Factors That Determine The Rate of Canadian dollar

The rate of Canadian Dollar was fixed in relation to the rate of US dollar during the period beginning from World War 2 and 1950, and during 1962 to 1970. The Bank of Canada was responsible to maintain the fixed value of Canadian currency by intervening in the market dynamics.

At present, the value of Canadian dollar in relation to any foreign currency is determined by the market forces such as demand and supply. Some factors increase the demand for the CAD while others increase demand for the foreign currencies, this demand /supply scenario puts an upward or downward pressure on the Loonie.

Some factors that play a major role in determining the value of Canadian Dollar, according to the experts at Knightsbridge FX are:

  • Interest Rates

The interest rates in Canada are relatively high, which increase the demand of CAD denominated securities from foreign investors. However, the performance of the Canadian Dollar determines the rate of return for the foreign investors. If the investors have a negative forecast about the value of CAD, they may demand higher interest rates on the CAD denominated securities.

  • Commodity prices

World commodity prices play a major role in determining the value of currencies. Same goes true for the Canadian dollar. The major share of Canada’s exports consists of commodities. So when the commodity prices are higher, the value of Canadian exports goes up, which results in an upward movement in the rate of CAD. In the same manner, when the prices of commodities go down, the value of exports goes down and results in a weaker Canadian dollar.

  • Inflation rate

The rate at which the price levels in a country go up at a given time, is called the inflation rate. Inflation rate plays a major role in determining the value of currency. If the inflation rate in Canada is higher than the Inflation in foreign countries, the purchasing power of CAD will be less when compared to that of foreign currencies, which results in decline in the value of CAD. In the same manner, if the inflation rate is lesser, the value of CAD is higher, which results in upward movement of the loonie.

  • Foreign investment

When foreigners invest in Canada, there is an increase in the demand for the CAD, which will push the value of CAD upwards. In the same way, Canadian investments in foreign countries will cause a downward pressure on the CAD.

These are some of the factors that influence the value of CAD. According to Knightsbridge FX many other factors such as international trade of goods and services, productivity, economic and political conditions also influence the value of CAD.

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