CAD/USD Exchange Rate

The Canadian clam has signifi fecestly appreciated against the U. S. dollar since the beginning of 2000. The CAD/USD exchange prise (currency in USD) increase from 0. 686 to 1. 015 as of March 18, 2011. There was a trend of CAD detention in 2003-2008, followed by a rapid dispraise in the second gear half of 2008. Since the beginning of 2009, CAD has risen sharply and has been duty rough at par with USD for the last ii years. The late CAD wait was caused by a number of factors and lead to certain economic consequences, which argon discussed next. Causes of the Canadian Dollar AppreciationAppreciation of the Canadian dollar in the last years can be explained by internal factors, much(prenominal) as performance of Canadian parsimoniousness and interest calculates, and external factors, much(prenominal) as commodity prices and weakness of the U. S. economy. State of Canadian economy. Canada has been quickly recover from the recent recession. For the year 2010, real gross domestic product grew 3. 1%, following a descend of 2. 5% in 2009. Strong economy makes Canada an personable stigma for investors who seek secure returns. This raises the demand for the Canadian currency and, therefore, pushes the exchange treasure upward.This argument is supported by the exchange rate fluctuations in the supra graph. The Canadian dollar was rising as the economy began to recover in the late 2009. State of the U. S. economy. Rise in CAD/USD exchange rate can be largely attri exclusivelyed to depreciation of the U. S. dollar. The U. S. dollar has historically been a safe investiture target for many investors. However, now this situation is ever-changing and demand for the currency is falling. The U. S. economy has been facing serious difficulties in the recent years. The boorishs trade deficit was almost $500 trillion in 2010, a 33% increase from 2009.The U. S. s also the creative activity largest borrower with a $4,453 billion of foreign debt. Weak economy an d high suspense are turning investors away from the American dollar, which is supported by its depreciation against other major currencies. Commodity prices. As Canada is a large manufacturer and tradeer of raw materials, the Canadian dollar is strongly affected by commodity prices. Many commodity prices, especially gold and copper, have been rising recently, making the associated industries much than profitable and strengthening the Canadian economy. Strong economy, in turn, attracts more investor, and the Canadian dollar appreciated due to change magnitude demand.Interest rate differentials. The U. S. Federal Reserved has demeaned the interest rate to current 0. 25% since 2008 in order to stimulate the economic growth. Canada currently has a high interest rate of 1% and thus attracts more investors for its short-term assets. film for the Canadian dollar increases and puts an upward pressure on the exchange rate. Consequences of the Canadian Dollar Appreciation encumbranc e on trade. The exchange rate has an fundamental impact on Canadian trade performance, especially with its largest trading partner, the U. S.The Canadian economy significantly relies on its export activity, but stronger Canadian dollar makes the countrys exports more expensive to foreigners and can reducing the trading volume. According to Statistics Canada, exports to the U. S. fell in 2009 by 36. 4%. Exports then change magnitude slightly in 2010, but still the amount was around C$73. 6 billion under the 2008 level. To prevent their exports from falling and keep their mart share, Canadian companies have to lower their price and sacrifice some profit. However, decline in exports should not be attributed only to the currency predilection.The U. S. economical wellness and trade agreements also affect the trading activity between two countries. On the other side, Canadian importers benefit from the currency appreciation. Canadian manufacturers can acquire materials, machinery and equipment at a lower cost, which leads to increased hood investment and productivity growth. Thus, strong currency is harmful to exporters and beneficial to importers. The dollar appreciation decreases Canadian export and increases imports, which negatively affects the trade balance and lower GDPs growth.However, lower import be offset negative consequences of export decline, and the union effect of the currency appreciation becomes muted. Effect on industries and provinces. non all industries are affected evenly by the currency appreciation. Manufacturers that hard depend on exports of their return are affected the most. Such industries let in forestry, transportation equipment, and machinery. Imported inputs, however, should also be interpreted into account when assessing the total effect of the appreciation.Industries that use high imported content in their turnout are less(prenominal) hurt by the rising dollar. For example, transportation equipment manufacturing highly d epends on export, but it also has high ratio of imports to production and can profit from cheaper imports. On the contrary, industries that heavily rely on exports but use low foreign content in production, such as forestry, are affected most adversely. The same logic applies to Canadian provinces. passing export-oriented provinces such as Ontario, Quebec and British Columbia are influenced significantly by the currency appreciation.Effect on un meshing. Rising Canadian dollar makes dig out costs comparatively higher and increase the total production costs in export-oriented industries. Profit margin falls, and manufacturers decrease their labour force. They also number more machinery and equipment as the imported capital become more personable due to the appreciating dollar. For example, in 2010, manufacturing sector experienced a loss of 37,000 jobs compared to 2009. This decrease in employment can be partially explained by the stronger dollar. Effect on productivity.Stronger Canadian dollar can have a official impact on the countrys productivity. Productivity greatly affects the countrys living standard. Improved productivity results in higher output, profits, pay and, eventually, the standard of living. As exchange rate increases, Canadian output becomes comparatively less competitive in international markets, and domestic companies start to drowse off their profits. Competition among manufacturers gets more intense, and companies try to retain their profits by change magnitude their productivity through investment in more efficient machinery and equipment.Companies capital to labour ratio rises due to lower cost of imported equipment, and increased use of capital leads to improved productivity in the long run. With lower exchange rate, Canadian firms are more profitable and have more money for capital investment, but with stronger dollar, imported capital and materials become relatively cheaper. On the other hand, higher exchange rate makes Canad a less attractive for foreign direct investment because of relatively higher labour costs. The boundary of this effect is limited, but the country still loses potential productivity gains.It is authorized for Canada to increase its productivity and relative competitiveness for the long-run strengthening of the economy in order to make the effects the currency appreciation less severe. To conclude, the appreciation of the Canadian dollar caused by a number of factors has a considerable effect on the countrys trade balance, industries, employment and productivity. However, these causes and consequences should not be considered in isolation but rather interdependently, and fundamental principle such as economic performance of Canada or the U. S. should be taken into account.