Canadian dollar

What Affects the Canadian Dollar

Canadian Dollar

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

  1. 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:
    1. 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.
    2. 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.
  2. 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:
    1. 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.
    2. 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.

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What affects the CAD/JPY?

The Canadian Dollar (CAD) and Japanese Yen (JPY) are among the most stable currencies in the world. However, like with all currencies, they can be affected by a number of different factors. In fact, Canadian Dollar and Japanese Yen fluctuations are a normal part of the global economy. These currencies can be affected by rate changes, as well as supply and demand that can determine currency rates based on monetary flow. This article explains what affects the CAD/JPY.

Check out the current CAD/JPY Rate.

1. Interest rates

Interest rates can affect all currencies, including the Canadian Dollar and Japanese Yen. In fact, the interest rate of these currencies are incorporated into the price of the currency, or the predicted price at a point in the future. Currency rates can rise if interest rates are expected to rise, while currency rates can decrease if interest rates are expected to decrease. Interest rates have effects which influence currency. Currencies of economies that are expanding are favored, especially when it comes to supply and demand. However, a country that has a GDP that is increasing faster than the monetary base it has is increasing the value of its currency. This increase in the value of the currency can be seen in currency rates.

2. Supply and demand

Purchasing power can affect currency rates, and the economy may go through different cycles called ‘inflation’ and ‘recession’. During a recession, the ability of a country like Canada or Japan to purchase goods on the international market can decrease. However, during inflation, the purchasing power of a country increases, which then can increase the value of these currencies. Both Canada and Japan have high purchasing power, and are known for manufacturing many different products which are then exported around the world.

3. Global events

Global and national events can have an effect on a country’s currency. In some countries, war and other events can have a negative effect on their currency. However, as Canada and Japan are both politically stable countries, they are considered good places for businesses to invest. For example, the Canadian cities of Toronto and Montreal are economic powerhouses, and attract foreign investment from businesses around the world. In Japan, cities like Tokyo and Osaka are financial centers, also attracting global trade – which has a positive effect on the Japanese currency. Businesses and financial experts will often keep track of a country’s national policy and other events that may affect their currency rates. They will keep up to date by watching financial news networks, or by reading financial publications on a daily basis.

4. Economic fundamentals

Economic fundamentals can have an affect on the currency of a country. These can include data reports, changes in economic policy within that country, investments, levels of business, and interest rates. When this information is released, it could deter international companies from making investments within that country, and the value of that country’s currency could be affected in a negative way.

5. Debt

The amount of debt that a country owes can also have an effect on their currency. Currency values can be affected when the amount of debt that a country owes is high.

Best Currencies to Trade At 2015

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An outlook at the Canadian dollar

As the year comes to a close the Canadian economy faces a five-year low. Owing to the slump in the sale and purchase of crude oil which is one of the country’s largest exports, the Canadian dollar reached an all-time low. It depreciated by 0.5 percent, closing at $ 1.1534 per U.S. Dollar. This has been recorded as the weakest that the Canadian currency has reached since July 13, 2009.

What Are the Current Exchange Rates?

Following the trend across the international markets and the domestic situation in Canada, the conversion rates have been predicted to be around:

  • The Pound Sterling to the Canadian Dollar is at 1.8384
  • The Euro to the Canadian Dollar is at 1.4533

Causes

  1. Crude Oil Export – Financial experts have ascertained that the fall in the strength of the currency is owing to the declining profits of the crude oil business. As crude oil prices fell to about 20 per cent below the $80 a barrel mark, the International Energy Agency predicted that about a quarter of the Canadian producers needed to turn in a profit if they wished to stabilize the CAD.
  2. Unemployment – Economists have noted that it is not only the reduction in oil prices, but also the high unemployment rates that have affected the Canadian dollar. The labour market has been said to have lost over 9,000 jobs since June this year. This officially pushes the rate of unemployment up by 7.1%. Only 6 out of 16 sectors reported higher payrolls. This development comes despite their being a rise in full-time hiring. In addition to the construction sectors of the labour market, those at the manufacturing unit also suffered losses. The resultant leads to a severe decrease in momentum as far as providing jobs are concerned. Economists apprehend that with the fall in oil prices, the labour market might see a further depreciation.

Consequences

Following the fall in the Canadian government bonds, the Bank of Canada has been compelled to release a statement that predicts a further drop in 2015. While the dollar stabilized over the week after the initial slump, the Bank has not ruled out a further depreciation. In fact, the lack of exporters as regards crude oil indicates that a full financial recovery is a good two years away. The Canadian economy could weaken further as the CAD/USD exchange rate is expected to fall to $1.18 in 2015. This could further slow the economic growth by as much as one-third of a percentage point. Coming at a time when unemployment rates are at an all time high, this news could potentially shock many of the Canadian citizens.

However, the Bank has also predicted that the weaker Canadian currency could broaden the economic recovery scheme. What this implies is that there might be an increase in the number of exporters that could potentially expand the economy by 2-2.5 per cent next year. This would solve the problem of indebted customers and could potentially prevent the correction in a housing market that is currently over-valued by 10-30 per cent.

Overall, however, the scenario in the global oil market has sapped the Canadian economy. Financial experts across the country are apprehensive of the year 2015 since they predict a further depreciation. Despite the marginal benefits of the weaker, the Canadian Dollar continues to be a major cause for concern in the country.

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An Outlook at the Canadian Economy

CAD

This year, the world’s economy has experienced better GDP numbers and positive media commentary. However, despite all these positive optimism, the U.S economy and the Euro-zone continue to be fragile and the momentum in Japan is tapering off. The situation is even worse in developing countries that are still facing various country-specific challenges, including increased financial risks, structural imbalances, incoherent micro-economic management, geopolitical and political tensions as well as infrastructural bottlenecks.

The Organization for Economic Co-operation and Development (OECD) recently published a report on an outlook at the Canadian economy. According to OECD, the Canadian economy appears increasingly vulnerable to recession as the country continues to grapple with the challenge of taking appropriate fiscal and monetary policy actions in the aftermath of the financial crisis. The international economic research and policy group forecast Canada’s economic growth to strengthen, but is highly threatened by substantial risks including still-high debt levels, divergent monetary policy, volatile markets and still-high financial instability amid a slowdown in China and the spread of the Ebola virus outside of West Africa.

Inflation continues to be a non-issue

The Canadian Chamber of Commerce in its 2014-15 economic outlook report states that the country’s economy is projected to strengthen moderately to 2.5 per cent in 2015, up from 2.3 per cent in 2014. This prediction is based on the IMF’s global financial and economic forecast that World Gross Product will grow at a pace of 3.3 per cent in 2015 compared to 3.0 per cent in 2014. The IMF report expects GDP to increase by 3.1 per cent in U.S., 7.1 per cent in China, 8 per cent in Japan, 2.7 per cent in U.K. and 1.8 per cent in Japan. The Bank of Canada reports that the country’s inflation remains well anchored. It is expected that inflation will remain within the bank’s 1.0 per cent to 3.0 per cent inflation-control range for the next two years.

Overall, there are signs of improvement for the world’s 11th largest economy. The Euro-zone is finally creeping out of the protracted recession and the U.S. economy continuing to recover. Majority of the emerging economies are starting to see accelerating economic growth characterized with growth in foreign direct investment (FDI) inflows, portfolio equity inflows and significant fall in non-bank credit flows. At present, the average rate of inflation in Canada and the U.S. is less than 2 per cent, around 2 per cent in the U.K., and below 1 per cent in the Euro-zone. In fact, even in countries in the periphery of the Euro-zone, such as Cyprus and Greece, prices have dropped recently compared to the previous year. However, for the country to reap full benefits of an improved global economic outlook, it has to tap new markets, strengthen its competitiveness, and secure and expand its involvement in global supply chains.

Major challenges and remaining fragility

Canada’s main growth challenge and fragility still remains lackluster international trade flows. These flows continue to remain the key policy concerns as long-lasting effects from the financial crisis continue to weigh on labor markets in the country. Vulnerability in emerging economies to both the external shocks and domestic structural bottlenecks, the remaining fragility in both the financial sector and the real economy in the Euro-zone, a possible escalation in geopolitical tensions and the risk of a failure in containing Ebola may also exacerbate any financial recovery. Other challenges include the risks and uncertainties associated with the divergence in monetary policies among the major developed countries, and QE exit and normalization of interest rates by the U.S. Federal Reserve.
Best Currencies to Trade At 2015

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