As with every currency in the world, the strength of the currency and rate of exchange depends on numerous factors. These factors include government policies, global economic trends and foreign policies. However, it is not always easy to determine what factors affect the strength of a currency. In this article we will attempt to discuss what the various factors that affect the Canadian dollar today are.
Factors That Affect the Canadian Dollar
- Market Influences: Since the Canadian economy participates in a floating exchange system, the value of the currency is determined by the market trends. What this means is that factors like change in the demand and supply of market commodities affect the Canadian Dollar. Market influences include:
- Internal Business Activities: Business activities within the country affect the dollar. Increase in activities (rise in production, sale and purchase of goods) increases the demand for the dollar. This leads to an net gain in currency strength. Similarly, a decline in the supply-demand trend leads to a decrease in terms of currency strength. Furthermore, if the supply is not adjusted to suit the lower demands, the value of the dollar may fall relative to other currencies.
- Movement of Investments: International investments strongly affect the Canadian Dollar. Every day companies in and out of Canada invest in foreign stock and bonds around the world. The cash flow from Canada where business companies buy foreign exports or invest in companies abroad, leads to changes in the value of the dollar. Whenever there is an increase in the number of foreign investments, the rate of the dollar rises. So, for instance, if a foreign company decides to invest in a Canadian business or product, the strength of the dollar rises in proportion. Similarly, when investments leave the country, the value of the dollar suffers.
- Government Influences: One of the largest factors that affect the value of the Canadian Dollar is the monetary policy of the government. The monetary policy is over-viewed by the Bank of Canada which outlines interest rates, foreign exchange rates and determines the financial policies. Some of the ways in which this affects the economy are:
- Regulating Money Supply: The Bank of Canada regulates money supply by buying and selling shares in the international market. In order to stabilize the value of the dollar, the Canadian bank will buy or sell significant quantities of the Canadian dollar. This prevents a sharp increase or decrease in the value of the dollar.
- Changing Interest Rates: The Bank is authorized to change interest rates across the country. What this means is that if there is a drop in the strength of the currency, the bank might increase the interest rates in order to stabilize the dollar. The fluctuations in market trends are an important factor in deciding the interest rates in the country.
As can be seen, the value of a currency is affected by multiple factors. These factors depend entirely on the current market scenario. Hence, although one can determine why the strength of the currency has increased or decreased, it is impossible to give the exact reason for market changes. The Canadian dollar is affected by a variety of internal and external factors and anyone who wishes to invest in shares or stocks is advised to follow the country’s financial trends closely. go here to read our Canadian dollar outlook.