Oliver Foote

Why Exchange Rates Vary, Canada’s Weakening Dollar

Exchange Rates Introduction

Recently, I have had been lucky enough to go travelling through some countries in Europe and paying for things in a different currency gets one thinking about economics, naturally. To start of my discussion I’m going to mention my visit to Edinburgh because last time I was in the UK it was July of 2022 and I noticed that the exchange rate was significantly different than it is today in September 2024. Back in 2022 the exchange rate was about 1.5 CAD to 1 GBP. This time it was closer to 1.8 CAD to 1 GBP. Basically, it got more expensive for me, but if you think about this on a surface level, currency rates are somewhat of a silly thing. I haven’t changed much, the amount of money that I make hasn’t changed much. On an individual level it’s kind of weird that at different points in time if you want to go and travel, the value of the money you make in your home country can decide the types of things that you can do and how expensive your vacation will be. With so many countries accepting your credit card it makes exchange rates feel even more fake. For example, I was in Denmark and I didn’t see a single Danish Kroner. I couldn’t tell you what that currency looks like, it didn’t even occur to me to exchange money before I went over there because everyone accepts cards. When money is digital it’s somewhat funny to me that there’s different “currencies” at all, it’s just numbers on a screen.

Why Currencies Strengthen or Weaken

Getting past the fact that digital payments are a somewhat funny concept, let’s talk about how the strength of your currency is determined. The different currencies and exchange rates are mostly based on your home countries economy. But this encompasses many things. Employment rates, inflation, Gross National Product, health of trading partners, imports/exports, government policies, etc. All currencies are technically free markets, this means that the market for your countries currency could hypothetically react to a bad piece of news and the currency could temporarily strengthen or weaken, sometimes significantly, on a single news story. Often, there is also a comparison going on, generally the benchmark is the United States, the European Union and various other large economies which are the benchmarks for healthy economies which other currencies are compared against. You may notice in your home country that there is inflation or it’s harder to find a job for a large part of the population, or foreign governments are not buying your governments bonds because the interest rate they are paying is lower than a competitors government. There are a lot of economic dynamics that can determine the value of your currency compared to the currency of another country.

Example of Bad News Affecting Exchange Rates

Let’s take the time that I went to the UK in 2022, arguably, it was a great time to travel to the UK because around that time the country was having governmental problems and their prime minister at the time was ousted, then an interim prime minister was given power, proceeded to break everything by implementing policies everyone agreed were horrible, then was ousted in a matter or weeks or months, all I remember was that a piece of lettuce lasted longer than the PM. These terrible policy decisions led to a loss of confidence in the UK, not quite as crazy as Brexit was, but this period of instability meant that the British Pound took a nice little fall, it was temporary, but the recovery wasn’t immediate. At that time buying British pounds from a foreign exchange perspective would have been a great time to do so since the country itself is largely stable, but this was just a temporary moment of instability. Now, one could argue, that we are getting closer to what the historical exchange rate was. I remember prior to Brexit the British pound was closer to 2.1 CAD to 1 GBP. There’s no saying if it will ever return to that value since Brexit is quite a permanent decision. But we can look towards other interesting economic indicators to get an idea of what exchange rates might look like in the future.

Canada’s Dollar Will Weaken in 2025

For Canada, unfortunately, the Canadian dollar is anticipated to weaken a little bit more in the coming year 2025, which means travel will become more expensive, and arguably makes now a good time to buy foreign currencies such as the USD or the GBP. So why is the Canadian dollar predicted to be weaker? There are a few reasons. Canada is beginning to see quite a jump up in the unemployment rate, people are continuing to lose jobs and new jobs are hard to find. Fewer jobs means fewer people spending money, less demand for goods, less goods produced, this slowing becomes a cycle and our economy “slows”. Since employees are basically business investment, and business investment leads to production or exports/imports. If there is less business investment, and fewer people working, it generally follows that the GDP or GNP of Canada will decline. Another reason this is problematic for Canada is because in the US the GDP has actually been climbing and they are our largest trading partner, so by comparison, we are doing worse, and our currency suffers. Additionally, Canada still has a largely resource based economy, with the largest one being Oil, and Oil prices have not been as strong in recent months, you may see this as a good thing since it’s cheaper to buy gas at home, but it does cause our currency to suffer somewhat. All of these problems, and inflation finally coming down led to the Bank of Canada to cut interest rates in an attempt to stimulate the economy.

Interest Rates, Bonds, and Currencies

Canada was notably the first G10 nation to cut rates. The country has now cut rates three times with another rate cut anticipated before the end of the year. Cutting interest rates means it should in theory be easier for businesses to get loans and invest back into producing goods and get consumers spending again since their loans will also be cheaper, this may also increase housing activity in Canada, which is also a huge part of the economy. But in the interim, our currency will likely suffer while we try to increase output because fewer people will want to purchase Canadian government bonds since the Fed in the United States has yet to cut their rates, making their bonds a more attractive place for people to leave their money. When the government sells bonds, it takes money out of circulation, meaning there are fewer dollars, which means less inflation, less inflation usually leads to a stronger currency. We did somewhat benefit from this since our inflation wasn’t as high as the United States during covid so we had a stronger currency for a while, but the US continues to surprise with their economic output, the machine continues to operate well, while Canada’s is suffering a bit at least from an economics point of view.

Conclusion

In conclusion, Canadians can expect travel to become a bit more expensive over the coming year or two, with the future TBD. I think we need to be pushing to improve investment in technology companies, so much of the world relies on tech and our only claim to fame is Shopify. Economics are a complex problem, and tech won’t solve all of our issues, but we do need to find a way to benefit from the knowledge that we have in the country, because we also suffer from a pretty significant brain drain, the best and highest paying jobs are in the US for our smartest students, so most of them will naturally decide to go there. The US is a great country if you have lots of money and good benefits, and if something goes wrong while they are there, they can always come back, it’s sort of a win-lose for Canadians and Canada. The best way for a Canadian to start a tech company is to move to California, at least last time I checked, so that needs some fixing. This will be a bit of a shorter post because I’m technically on vacation. Currently, I’m sitting outside a coffee shop called Przystanek Kawa in the wonderful Dutch inspired old town square of Gdańsk, Poland (bit of a mouthful, but the city is beautiful), and I’m going to get back to being a tourist and enjoy the sights. I’ll be in Warsaw tomorrow, then it’s off to Lauterbrunnen before returning home (sadly). I will say this solo travel thing does sort of get old quickly (this is only day 2 of 7 days solo) especially when you’re in a place where you aren’t speaking your first language, you can only see so many museums, castles, and church’s before it all starts to feel the same, and hostels have their own quirks and problems, definitely have some stories for another time about rough roommates. Anyway, it’s easy to complain, but I’m extremely happy and lucky that I can do this kind of travel even if it’s not high class luxury travel, I’m quite enjoying the experience and continue to love each new city I go to. That’s all for now, see you in Canada!

Is Now a Bad Time to Enter The Workforce?

Statistics Canada Thinks It Is

I have been hearing from many people recently that they are having a hard time finding work. This is not just anecdotal, Stats Canada came out with their most recent labour force survey and the unemployment rate is sitting at 6.4% as of June 2024 and has increased 1.3% in total since April 2023 which was a recent low (low = good). Among these groups, returning students (those who are going back to school in the fall) are at their lowest June employment numbers since June 1998. You may be saying not a big deal, students still have time to figure things out. While this is true, they are also the future of the labour market, and one of the most common ways for students to find their full time employment is through their summer internships or other jobs. If there are fewer students interning and less work for students overall I think this is a concerning development.

I think this lower student employment rate, and the overall high unemployment rate are leading indicators that we are heading for stagnation or even some form of a quiet depression. After having conversations with people from many different industries and hearing by word of mouth from friends of friends, a lot of companies are holding off on hiring right now, because there may be some level of uncertainty about whether their clients will continue to be in business in the coming year or two. This is leading to hesitation across the board regarding hiring people, and especially for new grads. This is making it even more challenging since companies that are shrinking their workforce or looking to hire would rather hire one senior person who can do the work of two people rather than hiring two junior people who need training.

Signs of a Drawn Out Downturn?

Of the types of economic downturns, in this case specifically a job market downturn. It is almost better to have a COVID-like situation where people get hit very hard but can bounce back relatively quickly. A long, slow, protracted downturn, meanwhile, may be felt by fewer people as a whole, but for those who do feel it they will not get a lot of relief in the coming years. It has become apparent that although the Bank of Canada has cut rates, the effect of the rate cuts will be fairly muted, as borrowing power only improves marginally for those looking to take out loans such as a mortgage and businesses are still hesitant to borrow money in order to invest. Because leverage is expensive as a whole right now, we will likely see less economic growth. In order for a business to get a good return on their investment they will need a rather high ROI to justify their cost of borrowing and justify a higher risk investment when a relatively risk free investment is still hovering around 3-4%. With inflation coming down below the risk free rate, there is almost no reason for businesses or investors to look towards higher risk investments which means that less money overall will circulate through the economy.

Canada is also in a special situation because we are always welcoming new highly skilled workers into the country, this could be a good thing for businesses because if there is more demand for their jobs they can theoretically pay a lower rate and get the same output. From the workers side this puts them in an unfortunate situation, they will have to find a way to stand out from the crowd or accept a much lower wage at a time when the cost of living is not improving much.

Real Estate Indicators of Slowing Growth

From the real estate side we are seeing some relief in the rental market, as a recent rentals.ca report showed the year over year rental prices in June 2024 were similar or lower in some of the larger metro areas compared to this time last year. We can also look to the resale market and the pile of inventory that is building up, especially in some segments such as condos. This has yet to manifest in much lower prices, but there are some individual great deals for those who are looking. The market is a whole isn’t seeing much price pressure likely due to the fact that owners are finding a way to hold on until they get the price they are looking for and aren’t in a rush to sell. The number of truly “distressed” sales has only increased marginally anecdotally speaking and banks have been instructed to help those who are in distressed situations to manage their real estate. We likely won’t see a significant decline in prices in the coming years, but prices may slide slowly downward until borrowing becomes a bit more affordable.

I do foresee a time in the next 3-5 years as things improve with respect to borrowing costs that prices will jump up due to the lack of new construction sales. New condo projects have been taking longer to sell and fewer people have been purchasing them. This also corroborates my previous point about lower investment as we’ve reached a point in Toronto where about 50% of condos are owned by investors which means that they are soon to be the majority of the potential buyers, if not already are, and if investors are not investing their money, condos are not going to be built. If condos are not built, there will be less housing while more people continue to come to the Toronto area which simply supply and demand says higher prices.

Potential Improvements in Student Economics

Another interesting development has been the cap on student visas. On balance I view this as a positive development as I believe the intention of capping them was to prevent predatory “career” schools from taking advantage of students and not providing them a proper education. I quite frankly see nothing wrong with this, although it may inconvenience people who were all but too happy to take advantage of these students whether for cheap labour or for absurdly high tuition fees. The only potential downside to this is that some reputable institutions may lose some of the funding they were anticipating from international students and have to make cuts. But again, I see nothing wrong with a little competition, and competition breeds innovation, so maybe in the end this will turn out to be a positive development across the board. I also see positives when looking at student adjacent market such as the student rental market around campuses.

They will likely become somewhat less competitive with this change. I recall from my time at university that it was truly a crapshoot trying to find a half decent student house. The number of questionable landlords who didn’t take care of their properties was high, the inability of students to clean up after themselves was bad, the SERIOUS lack of supply was horrendous. Overall, there were frequently poor outcomes and often just plain unsafe living conditions. So some relief in that regard is well overdue in those markets. Although, I’m not certain that this will affect the larger universities who may not be as highly affected by the student visa quota. Interestingly, Graduate level visas have not been affected at all which is in line with the concept that Canada is interested in highly skilled workers. (although arguably our problem is with trades workers not highly skilled workers).

Signals from The United States

Interestingly though, if you look to our friends in the south (the US) their stock markets are continuing to do well, which is arguably signaling that things are improving over there and there is confidence that they will continue to improve. The US employment rate is still hovering around an all time high (a positive development) and since they have a more diverse economy they are more resilient overall. You can’t predict the market, but generally when I look at my portfolio and get very happy that is usually a sign that it’s time to sell some of it and cut down on the risk. However, I’m more of a buy and hold type of investor rather than a time the market investor, so I’ll probably just ride whatever wave comes and try to build up some cash in order to purchase any opportunities that may come along in the next little while.

It will be interesting to see how all of these different aspects of the economy develop in the next couple of years, I will be following them closely and doing my best to keep you up to date on them. Hopefully you found this discussion interesting. Feel free to let me know your thoughts any time, I’m always interested to talk economics.

Keep investing,

Oliver

Sources:

Stats Canada Labour Force Survey June 2024: Click Here

Student Visa Cap News: Click Here

My last post: https://oliverfoote.ca/dont-invest-in-stocks-or-real-estate/

Post Communism in The Soviet Union and Economic Growth of The Open Market:

If you have read some economic history on the Soviet Union, you’ll know that once the Iron Curtain fell and the market became open, it created a lot of prosperity for those who were in the right positions and had the right connections. Since almost all means of production in Russia were state owned at the time, when the Soviet Union fell there was no clear ownership over the state assets anymore, and the people we now know as Oligarchs were able to make deals with state officials and get some once in a lifetime deals on state assets, obviously laden with corruption of all sorts. The Russian story gets quite detailed with people falling in and out of favour with the government, suspicious deaths of Oligarchs and eventually with Vladimir Putin seizing power. I would recommend reading the Wikipedia page on Russian oligarchs if you’re curious.

While the Russia story is fascinating, I wanted to use this post to talk about some smaller scale success stories that occurred as a result of the transition to a free market in some of the Soviet Union satellite countries. Since I have family in Poland and an uncle who runs a small furniture factory out of an old barn, I thought his story and the story of a few entrepreneurs in this small village of 2000 people would make a great example. After the fall of communism in Poland in 1989 and the privatization of the market, it opened opportunities for many people, even small business owners to ride the wave of economic growth that would come. As an example let’s take the story of one family in the village where my mother grew up. The business owner has a very well known story in the village and it is a story of right place right time in his case.

Around the time when the market was opening up and becoming more privatized Greg took out some business loans from multiple banks to purchase land and equipment for his furniture business. Since they were only beginning to regulate open market banking you could shop around at various banks and get each one to lend you a chunk of money for your business. During communism inflation was consistently hitting double digits every month to the point where it hit 1200% in 1990. These two factors set him up for great success with respect to timing. If you have a means of production to make current income at sell goods at current market prices, but your loans were taken out while hyperinflation is happening, you can pay down those loans for pennies on the dollar in a few short months (or groszy on the złoty for my Poles). I’m not entirely sure who would be lending money in an economy with hyperinflation, but I would imagine the lenders tried to protect themselves with very high interest rates or maybe only lend money pegged to a more stable currency. But even interest rates might not be a great defence depending on the severity of the inflation. When there is hyperinflation it’s a very bad time to be a lender and a very good time to be a borrower. So Greg and a few others in the village became significant land owners and business owners and paid next to nothing for it. Now he owns a small shopping mall in the town of Krosno nearby and a vacation home in Spain, so he’s done well for himself. Timing isn’t everything, building a business is not an easy endeavour, but it can help speed things up a bit.

As another example from the same village let’s take my uncle. He was just getting out of school when communism fell. So him and a friend decided to try and start up their own furniture businesses and they worked together to learn all the tricks of the trade required to set up shop. I don’t think he ever expected his business to do as well as it has. At the time he was just trying to find a way to work and make some money. While he didn’t get the very lucky timing of taking out loans while hyperinflation was hitting, he was able to ride a different wave of prosperity. Poland joined the European Union in 2004. This meant free trade and the goal to bring up countries like Poland to higher standards of living. With the free market, the free trade of the EU and the direct financial assistance given to Poland, their economy began to grow. All the while my uncle was selling his furniture to dealers in larger cities and building a network of connections and people who wanted to buy his product. He expanded and bought new equipment and now runs a very sustainable small business.

Poland is now quite “westernized” in it’s standard of living, there is opportunity if you want it, and the big cities are doing quite well and you can find some very well paying jobs in Warsawa. This more advanced stage also introduces multinational corporations who now see a business case to open up stores in the country, for example IKEA. When I had this realization that IKEA might come in and steal all the business from the small furniture manufacturers, I was somewhat concerned for my uncle. But funny enough I actually think something even more interesting has happened. IKEA isn’t exactly known for having top quality materials or amazing variety. What I think has happened is by introducing this new player in the market is it actually elevates my uncles product to a more premium level.

The people who may buy from IKEA to outfit their small apartment in the big city, aren’t necessarily the same people who are staying long term in Poland and are looking for something that is better quality and can be built to order. They serve two completely different markets, and there is space for both of them. Also reflecting back on one of my later blogs about how zoning bylaws in North America don’t encourage small business, the design of a European country is simply more friendly to a wider variety of commerce and smaller businesses in my opinion. Overall, I think there is a more local attitude that still prevails in Europe while in North America we tend to prioritize huge multinational corporations and big box stores.

It is possible that over time things will change, and my uncle will have to find a different way to sell his products. But for now I think his business will continue to grow and serve his market. From a purely economic perspective I find it fascinating how many similar stories there are to his in the soviet satellite countries and Russia itself. Even just within my family’s small village in Poland there are numerous well known entrepreneurs who set up shop around the fall of communism and have expanded their reach to supply stores across the country.

Every once in a while the economy presents a great opportunity to start up a business and in the moment you might not even realize it’s happening. As a recent example, investing in the stock market during COVID. The only thing I wish I did differently was borrow more money to invest with. Hindsight is 20-20 in these situations at there is always risk to borrowing money and you can never really predict what will happen in the future. Our present economy has becoming challenging for a lot of people and if you read the news, there has been news of thousands of tech layoffs in the US. However, many of these employees turn around and start their own companies once they get let go and are finding great success doing so. There is a lot of opportunity available even now, and great sustainable businesses are often built during challenging times. Understanding the past can give you insights into what economic forces were in effect during that moment in time and help improve your radar for understanding when and where the next opportunity might present itself. Communism and COVID are just two of many different examples around the world of global economic shifts that can present great opportunities for people who are ready and able to capitalize on them.

All the best,

Oliver Foote