Explaining the Canadian Dollar for Dummies

The Canadian dollar is one of the major currencies in the forex market. It’s also the fifth most held currency as a reserve.

Its currency ranking is interesting when you think about it. Canada’s economy is actually 10th in the world and the country ranks low on the list of major economies in terms of population.

However, it’s also the 11th largest export economy in the world.

The loonie was not part of the original Bretton Woods system, freely floating until 1962. Canada then adopted a fixed rate until 1970 when high inflation compelled the government to move back to a floating regime.

The Bank of Canada

Behind the Cryptocurrencies News Canadian dollar is the Bank of Canada, which tries to find the right balance between policies that will boost employment and economic growth while also controlling inflation.

In spite of the importance of foreign trade to Canada’s economy, the Bank of Canada doesn’t intervene. The last recorded report of intervention was actually ironic, in that it was in 1998 when the government decided that intervention was futile and ineffective.

The Economics of the Canadian Dollar

Canada has enjoyed relatively strong growth over the last 20 years with two relatively brief periods of recessions, which were during the early 1990s and 2009.

The country has had persistently high inflation rates. However, improved fiscal policies and better current account balance have led to lower budget deficits. There have also been lower inflation rates.

It’s also important to note that Canada is high exposed to commodities. It is a significant producer of petroleum, minerals, wood products, and grains. The trade flows from those commodities can impact investor sentiment regarding the loonie.

Canada and the United States Forex Brokers List have had tight trading relationship. And even though Canada pursues very different policies from the US, the conditions in the US inevitably spill over into Canada. Therefore, traders closely monitor the developments in the US when they trade the Canadian dollar.

However, relationships can diverge. Because of Canada’s market structure, it managed to avoid many problems with bad mortgages that affected the United States.

On the flipside, tech companies are less significant to Canada’s economy. This resulted in the relative weakness in the Canadian dollar during the booming tech period in the US in the 1990s.

What Drives the Canadian Dollar?

The performance of the Canadian dollar is highly linked to the performance of commodity prices. In Canada, the price of oil is especially significant to currency movements.

Investors tend to buy the Canadian dollar and short oil importers when oil prices are moving up. In the same manner, there is some impact on the loonie fiscal and trade policy in countries like China.

And because of the country’s economic health, Canada has somewhat high interest rate among developed countries.

Canada also enjoys a new reputation for balanced fiscal management and finding a workable middle path between a state-dominated economy as well as a more hands-off approach.

As mentioned, Canada’s economic health is uniquely tied to the US economy. Although it would be wrong to assume a one-to-one correlation, the policies in the US can have significant influence over the course of Canadian dollar trading.

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