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Living in a state that borders Canada, it is not uncommon to see many Canadian license plates as you drive around. Lately though, it seems like I have seen an increasing amount of Canadian license plates. Last week I was shopping at a local outlet mall and I noticed that about every other car had a Canadian license plate.

There are a couple of factors that contribute to the increase in Canadian visitors to our state.

1. Their dollar has reached parity with ours, and we sell many things for cheaper prices than they would find in their homeland.
2. Our state has much lower sales taxes, thus lowering the purchase price.
3. Not all American brands are sold in Canada.

I am not the only person who has noticed this. In a recent article in the Bellingham Herald by Dave Gallagher (Bellingham is about 20 miles from the Canadian border), they state that “we have the Canadians to thank for strong retail sales numbers during the holiday shopping season.” In college I worked at a restaurant that was near the mall (2004-2007), and observed each weekend the large number of Canadians that would come in to eat after they were done shopping for the day. In December of 2006, the exchange rate hovered around $1.15 CAD per $1 USD. Back then there were a lot of Canadian shoppers. Today the two currencies are as close to equal as you could possibly get. Today’s prices are about a 13% decrease from what they were a year and a half ago for them.

The closer a town is to the border, the greater the increase in total sales were. “While the state average increase (in sales) was just 2.7 percent, Bellingham was up 7.4 percent. The border towns of Blaine (up 12 percent), Lynden (up 12.8 percent) and Sumas (up 18.2 percent) saw a big boost in sales during the holiday season.” For those not familiar with the area of Northwest Washington, the towns of Blaine, Lynden and Sumas are not very large at all, and are definitely not considered “shopping destinations.” I feel that a major reason that sales in those towns rose so much was because Canadians were driving across the border to fill up on the cheaper gas. According to the article, “The price of gas in Canada is around $1.19 a liter, or $4.50 a gallon.” While Whatcom county typically has the highest gas prices in the state, these prices are at least $.50/gallon cheaper than our neighbors to the north pay.

Any theories on how low the dollar will go against the Canadian dollar this year? My guess is $1 USD = $.85 CAD. This is not based on any intense calculation of any sort. This is just a hunch.

Here is a thumbnail of what Whatcom county looks like so that you can see the relationship between these border towns and Canada. This image was obtained from dickmartin.com.

Gas prices continue to rise across the country. Here in Seattle, a gallon of regular costs $3.51 at the local Shell station. Seems crazy to think that about a year ago the price was about a dollar less. We have a few factors that are contributing to this rapid increase in price.

First of all is the obvious. Refining capacities can only go so high, and the demand for oil continues to rise each day. Using the classic model of supply and demand it is very easy to see why prices have risen. If we put more fuel efficient cars out on the roads we would theoretically demand less gas because we would be using less of it. I think that when people have vehicles that get better mileage they will drive more. They will use the better mileage as an excuse to drive more and make more unnecessary trips, causing them to demand exactly the same amount of fuel.

The second main reason that gas prices have risen is because the dollar has decreased in value in comparison to other world currencies. Think about it for a minute. Most of the gas that we consume we import from other countries. When we buy foreign oil, we must convert our currency into theirs to make the transaction. If we assume that the price of oil remains constant in a foreign currency, and our currency is losing strength to the foreign one, it is easy to see why the price of oil would greatly increase for us.

Imagine that in 2007 $1 was worth $5 in a foreign currency. If a barrel of oil cost $100 in the foreign currency, it would cost us $20 USD to buy the barrel. Suddenly in 2008 our $1 is only worth $4 in the foreign currency. That same barrel of oil still costs $100 though. Because of the change in the exchange rate, it now costs us $25 to buy that same barrel although the price in the foreign country has remained the same.

It is interesting to see how supply and demand are not the only controlling factors on the price of gas in the United States.

Not all companies that trade on the NYSE or NASDAQ are American companies. Some are actually headquartered in a foreign country. Consider the company Cemex (CX) for example. Their company is headquartered out of Mexico. A good portion of their business will be conducted in Mexico, and therefore their payments will be made to them in pesos, the Mexican currency. When they do business outside of Mexico, they will likely be paid in the other country’s currency, which will later have to be converted to pesos.

The main issue with currency risk occurs when a company has to create financial reports for their shareholders. When a foreign company like Cemex creates a financial report for US investors, they list all of their earnings and expenses in US funds, although they are really in Mexican funds. Americans can made better comparisons from one company to the other when everything is in the same currency. The main issue here is that the exchange rate is not always going to be the same. This will create some discrepancies in the financial report that the company gives.

Imagine that in FY 2006, Cemex had total net income of $10 billion pesos. At the time that they reported, the exchange rate was 10 pesos per dollar. This means that on the Annual report to US shareholders, Cemex would report a net income of $1 billion dollars. Now, imagine that in FY 2007, Cemex has a total net income of $11 billion pesos (a 10% increase), but the exchange rate at the end of FY 2007 is 12 pesos per dollar. For FY 2007, Cemex would report a total net income of $.916 billion (a 8.4% decrease). To the Mexican investor Cemex had a great year, but to the American investor the year was a disappointment.

Not everyone invests in foreign companies, but if you are looking into one you should definitely take this into consideration. You could be in for a bit of a surprise if you don’t.