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weakening of the canadian dollar

Author: Navnit Singh

Date: January 10, 2016

Recently, the Canadian dollar has been depreciating and is currently dipped below $0.70 USD. This means, with every $1 CAD one can purchase less than $0.70 US dollars. This is the lowest it has been since 2003. The downturn in oil prices has been affecting the loonie. On January 12, 2016 the price of oil dropped down to $30 per barrel. In June 2014, the price of crude was $105 per barrel whereas in recent months, it has been fluctuating around $40 per barrel. This has pushed the Canadian economy near a recession. Also, it has significantly dropped demand for Canadian currency. Oil is purchased in USD and then, exchanged for CAD to pay workers, pipeline operators, refiners, and more. Since the price of oil has dropped, less foreign currency flows into Canada, decreasing the demand for the Canadian dollar, thus making the currency weaker.

Canadian oil exports have decreased with the falling price of crude adding to the trade deficit in the economy. The central bank had been responding to these changes by cutting rates. The divergence in monetary policy between the Fed and BOC has led to further downward pressure on the dollar. The US economy is doing better than pre-recession levels (unemployment is at 5 percent). Therefore, the Fed felt it was time to increase the rates for the first time since 2008. The increase in rates means that billions of dollars from investors will enter the US banking sector. This new demand for US currency will push the USD higher against all currencies including the CAD. Due to this, travelling to the US has become more expensive. Not only that, but the prices of imported goods such as cars, fruits, and vegetables will increase. Nonetheless, this makes it cheaper for US travellers to purchase Canadian goods and services. Thus, the weak Canadian dollar may be able to help manufacturers and exporting however, it is not guaranteed. Whatever is in store for Canada in the future will definitely be the result of many accumulated shocks in the economy.

Sources:

CBC News, The Globe and Mail, National Post, Huffington Post, and The Toronto Star