The Canadian dollar

Since 2007 the Canadian dollar is the 7th most traded currency in the world. The canadian dollar is also known as the loonie  (french huard)  in reference to the bird that  appears on the dollar coin. Unlike other currencies in the Bretton Woods system, whose values were fixed, the Canadian dollar was allowed to float from 1950 to 1962. The Canadian dollar fell considerably after 1960, and  returned to a fixed exchange rate regime in 1962 when its value was set at US$0.925, where it remained until 1970. In order to fight inflation  the canadian dollar was allowed to float in 1970 and it appreciated  to where  it was worth more than the U.S. dollar for part of the 1970s. In April 1974 it reached US$1.0443.

The Canadian dollar fell in value vs the Usd during the technological boom of the 1990s that occured in the USA.The Cad rose sharply against the Usd  in 2007 due to the continued strength of the Canadian economy and the U.S. currency’s weakness on world markets. In September 2007 it reached parity with the Usd  for the first time since November 1976.

Because  84% of Canada’s exports go to the U.S., and 56 of imports into Canada come from the U.S., Canadians are very interested in the value of the Cad vs the Usd . Canadians become very concerned when the Cad appreciates is valued too highly against the Usd because it the price of canadian exports increase also.

Generally the Bank of Canada has no specific target value for the Canadian dollar and has not intervened in  the foreign exchange markets since 1998. The Bank of Canada’s position, officially,  is that market conditions should determine the worth of the Canadian dollar. However,  in October  2009  the Bank of Canada was concerned that the high value of the Cad (0.97$ US) would do harm the Canadian economic recovery, and  announced they would continue the interest rate at the historic low of 0.25 percent and this caused the Cad to depreciate by more than 2 cents.

The fluctuations in the value of the Canadian dollar nowadays tends to  correlate with changes  in oil prices, reflecting the dollar’s status as a petro currency owing to Canada’s significant oil exports. Observing  the Canadian dollar’s behavior against the U.S. dollar allows foreign exchange economists to observe  patterns in the US economy that could not be seen otherwise.

THE USD/CAD

In early 2009 the Usd was worth well over $1.30Cad. In February 2009 however it started the depreciate and this December we saw the Usd reach 1.02$ Cad. Throughout the year the Usd did attempt to retarce its losses vs the Cad, however since this summer it has barely been able to retrace 23% of its losses. With the Usd about to fall below 1.0559 Cad, the situation is becoming one of concern for Canada. The Bank of Canada could not raise interest rates in the near future as this would send the Cad to rise too quickly against the Usd. The effect would be detrimental to canadian export markets (84% of canadian exports are to the Usa). The Bank of Canada mentioned that it would intervene if the CAD apprciates too strongly however it is not habitual for the BoC to do so, and one is doubtful that Canada has the means to affect the currency markets in a very significant manner. It could perhaps do so in conjunction with other Central BAnks if an intervention were needed to prop up the faltering  Usd.

In any case, the rates to look out for in the coming weeks center on 1.0877 as any break above this would indicate a bullish trend for the Usd. Any break under 1.0559 needs to be considered carefully as this is indicative of a very  deep bearish trend and it is likely that if the Usd reaches parity with the Usd  some type of intervention would be in the works.