Mixed signals are sent with the erratic rise and fall of the Canadian dollar. There was a drop in the currency for the past few months which was caused by the lowered interest rates by the Bank of Canada. The decline or depreciation of the Canadian currency could have also precipitated by the rate in the central bank which would then benefit customers with lowered rates for their loans form banks such as Bank of Nova Scotia, Royal Bank of Canada, Toronto-Dominion Bank, and Canadian Imperial Bank of Commerce.
The cut in the policy rate helps companies raise money in the domestic level. This does not just benefit retail and consumer loans but also increases consumer demand for various good s and services. With these available funds, the currency then depreciates which is seen to be beneficial to exporters but may turn out for the worst with importers.
Domino Effect of High Interest Rates
The interest rates in a neighboring country may often affect others in an economic perspective. When it comes to loans, high interest rates offered in one country generates higher returns and could affect market behavior in some countries. In this case, if the United States raises the interest rates at some point within the year, Canadians would then prefer to store their funds in the US Treasures rather than pool in Canadian debt. This then pulls down the value of Canadian currency as these volatile markets are driven by investor speculations or expectations. The rate hike in the United States puts pressure on Canadian currency.
Canada has always had a robust economy especially with the most chunk of the income coming from exports. However, the country’s overt dependence on commodity exports has also fired back and exposed Canada to further risks of a downfall in the prices of commodities.
The Power Struggle in between Countries
Canada has always associated itself as one of the elite members of the Group of Seven which includes Germany and United States. Well, currency traders don’t really care about the list of G7 members any longer than what currencies fare well when pitted with the US dollar. Canadian dollar has dropped for about 2% against US dollar.
A country’s currency value speaks volumes about the state of an economy. Are you lagging behind or coming too strong? Any country would want to be defined as a strong currency because it means that there is a rise in demand and market value for your products and services. A weak currency value would suggest the opposite.
Currency value as a means to gauge ones economy ceases to be an exact science anymore. This is because there are hundreds to thousands of investors or traders work on their algorithms to buy and sell currency without the intent of purchasing any goods or services. Canada has suffered a low blow in terms of currency ratings and Canada cares about the currency values because it shows who holds the upper hand of things. For that reason alone, Canada wants to spring back and be the stronger currency.