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This article describes the effects that exchange rates can have on consumers. It explains that inflation, interest rates, real estate, investments, and the job market are all indirectly impacted by exchange rates. A weak domestic currency can cause consumers to lose out on real-estate purchases to foreign buyers, spur economic growth (increasing employment prospects), and it increases the inflation rate of countries that are big importers. A strong domestic currency may reduce the prices of foreign goods and impact the returns on investments.

I chose this article because I found the information beneficial to my knowledge when pursuing new investments or a real-estate purchase. I found it convenient that this website detailed how exchange rates affect consumers on a domestic scale rather than as a country as a whole.

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The average person experiences the value of currency as fairly stable from day to day. The price of a cup of coffee every morning is $1.50, the fixed-interest car payment and mortgage are the same every month, and for a salaried worker, even the paychecks are identical. The fact that the value of currency is constantly fluctuating in relation to other currencies only seems to matter for most people when planning a foreign trip or making an internet purchase from a foreign website. This limited view, however, is mistaken.

The indirect impact of exchange rates and their fluctuations extends much more broadly and deeper in ways that affect several of the most important aspects of our economic lives-like how long it takes to get a job, where we can afford to live, and when we can retire. Exchange rates have a tremendous influence on the economy both in the near term and over prolonged periods of time.

Exchange Rates and What You Pay for Goods

In this era of globalization, goods from other countries are as commonplace, or sometimes even more commonplace, than those produced domestically. Exchange rates have a significant impact on the prices you pay for imported products. A weaker domestic currency means that the price you pay for foreign goods will generally rise significantly. As a corollary, a stronger domestic currency may reduce the prices of foreign goods to some extent.

Let's illustrate the impact of a weaker domestic currency on product prices with an example. Assume that the Canadian dollar (C$) declines by 10% against the U.S. dollar (US$) over the period of a year, from a rate of 90 U.S. cents per C$ (US$1 = C$ 1.1110) to 81 U.S. cents (US$1 = C$1.2350). What would be the price change in Canadian supermarkets for a pound of California almonds that are available in the U.S. for US$7? All else being equal (assuming no other costs and only taking exchange rates into account), the price of California almonds in Canada would increase from about C$7.78 (i.e., approx. US$7 x 1.1110) to C$8.65 (US$7 x 1.2350) per pound.

As another example, let's look at the effect of currencies and prices when more than one country is involved. For example, say that the euro tumbled more than 20% against the U.S. dollar over a one-year period. During the same time, say the Canadian dollar had also declined, but only by 10% against the U.S. dollar, by comparison. As a result, the Canadian dollar had actually appreciated about 15% against the euro over that year (e.g., from C$1 = EUR 0.65 to C$1 = 0.75), resulting in Canadians paying somewhat lower prices for European products such as wine and cheese.

The change in the price of imported products depends on how the currencies of the exporting nations (i.e., those from where these products have been sourced) have fared against the domestic currency. Following the 2008-09 financial crisis and ensuing recession, the U.S. dollar reigned supreme against most major currencies, which resulted in American consumers paying relatively lower prices for imports such as German automobiles or Japanese electronics.

Exchange Rates and Inflation and Interest Rates

A weak domestic currency can push up the inflation rate in a nation that is a big importer, because of higher prices for foreign products. This may induce the central bank to raise interest rates to counter inflation, as well as to support the currency and prevent it from plunging sharply. Conversely, a strong currency depresses inflation and exerts a drag on the economy that is tantamount to tight monetary policy. In response, a nation's central bank may move to keep interest rates low or reduce them further so as to preclude the domestic currency from getting too strong.

The exchange rate thus has an indirect impact on the interest rate you pay on your mortgage or car loan, or the interest you receive on the money in your savings or money market account.

Exchange Rates and the Job Market

A weak domestic currency spurs economic growth by boosting exports and making imports more expensive (forcing consumers to buy domestic goods). Faster economic growth usually translates into better employment prospects. A strong domestic currency can have the opposite effect, as it slows economic growth and curtails employment prospects.

Exchange Rates and Investments

Exchange rate fluctuations can have a substantial impact on your investment portfolio, even if you only hold domestic investments. For example, the strong dollar generally dampens global demand for commodities as they are priced in dollars. This lower demand can affect earnings and valuations for domestic commodity producers, although part of the negative impact would be mitigated by the weaker local currency.

A strong currency can also have an effect on sales and profits earned overseas; in recent years, numerous U.S. multinationals attributed a hit to the top-line and bottom-line due to a stronger dollar. Of course, the effect of exchange rates on portfolio returns is well known. Investing in securities that are denominated in an appreciating currency can boost total returns, while investing in securities denominated in a depreciating currency can trim total returns. For instance, say that European stock indices reach record highs while the dollar is strengthening quite aggressively against the euro. American investors who had invested in those European-listed shares could actually see their real returns reduced substantially by the unfavorable exchange rate.

Exchange Rates and Real Estate

A weak or undervalued domestic currency can be like having an open-ended Black Friday sale and what is marked down is every single good, service, and asset in the country. The trick is, only buyers who can pay in the stronger foreign currency get the sale price. This attracts foreign tourists, which can be good for the economy. However, it also attracts foreign buyers looking to scoop up cheap assets and outbidding domestic buyers for them.

Foreign buyers have pushed up housing prices in nations with a weak currency. Imagine you are house hunting and suddenly you are bidding against people who are getting, say, an automatic 30 percent discount on the asking price. Even if you are not house hunting, high housing prices and low supply affect rent as well. In the past decade, local demand for housing has also been very robust in numerous nations, as their central banks held interest rates at record lows in a bid to stimulate their economies. This also had the effect of pushing their currencies to multiyear lows, raising fears of a global currency war.

The Bottom Line

Just like an iceberg, the major impact of exchange rates fluctuations lies largely beneath the surface. The indirect effect of currency fluctuations dwarfs the direct effect because of the huge influence it exerts on the economy in both the near term and long term. The indirect effect of exchange rates extends to the prices you pay at the supermarket, the interest rates on your loans and savings, the returns on your investment portfolio, your job prospects, and possibly even on housing prices in your area.

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Understand the Indirect Effects of Exchange Rates

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The average person experiences the value of currency as fairly stable from day to day. The price of a cup of coffee every morning is $1.50, the fixed-interest car payment and mortgage are the same every month, and for a salaried worker, even the paychecks are identical.

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Question #1
After researching this topic, I was most surprised to learn that four major factors influence the Canadian dollar. I always considered oil prices as the dominant factor in determining value, but now I know that it is just one component.

Question #2
This topic relates to me because if the value of the Canadian dollar drops versus the US dollar, then the prices of American goods will be expensive for me to purchase.

Question#3
The most important fact that I would pass on to a family member is that exchange rates determine the prices of imported goods which directly translates to the cost of domestic goods.

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This image depicts our trade partners for crude oil ranked by the countries where we earn the most revenue. This information is important since it demonstrates our dependency on certain nations to purchase our oil. These countries help support the value of the Canadian dollar.

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This image depicts the value of the Canadian dollar versus the US dollar for the past 45 years. I chose this image because it is important to know how the value of our dollar compares to the dollar of our most frequent trade partner.

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This padlet focuses on exchange rates and their effects on the Canadian market. Once you have finished navigating this padlet, you will understand how exchange rates work and why consumers should monitor them.

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This video focuses on the four main factors that can affect the price of the Canadian dollar. They include oil prices, yield spreads, labor productivity, and market volatility. When the price of Canadian oil increases, the cost for consumers will also increase. If the interest paid on Canadian bonds exceeds American bonds, the demand for Canadian bonds and bills increases. Whenever Canadian workers produce more the American workers, there is an increase in supply, which Canada cannot offload into their economy. It results in the Canadian dollar becoming weaker, so our goods are more attractive for purchase. Lastly, when there is an increase in global financial risks or growth, consumers flock to a safer currency, usually resulting in the market price of the Canadian dollar dropping. As a result of these four factors, the demand for the Canadian dollar either increases or decreases.

Before watching this video, I assumed that the value of the Canadian dollar depended solely on oil. I now know that multiple factors can influence its value and affect how it compares to another currency. I thought this video could give people a better idea of what factors constitute the value of a currency.

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Key factors that influence the Canadian dollar

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This article describes how the Canadian dollar and foreign currencies affect agricultural trade. It explains that while a good relationship between the Canadian and US dollar is crucial, Canada should monitor how the Canadian dollar relates to the currency of our other trade partners. Considering that several agricultural markets operate in US dollars, the Canadian dollar must maintain a close equivalence with the US dollar so Canadian farmers will continue to see profits. On the condition that the Canadian dollar is higher than a foreign currency concerning the US dollar, Canada could potentially do business with them since that country may need less produce.

Before reading this article, I did not know that the US dollar played a crucial role in the agricultural market. It did well to clarify how important the relationship between the Canadian and US dollar is while also explaining the importance of monitoring the currency of other countries.

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Our trade surplus or deficit with other nations has a significant influence on the Canadian dollar. For example, a higher price for crude oil leads to an appreciation of the loonie. Interest rates also have an effect.

How often have you heard this statement? "The value of the Canadian dollar has dropped, and that will be good for the prices of our commodity exports." The inverse is often stated as well. "The value of the Canadian dollar has increased, and that will be bad for the prices of our commodity exports."

Take, for example, a bushel of Canadian oats sold into the U.S. market at $4.00. If the U.S. dollar and Canadian dollar are at par (worth the same amount), $4.00 in the U.S. is also $4.00 in Canada. However, if the Canadian dollar is worth only 75 cents in U.S. funds, the $4.00 per bushel price of oats in the U.S. equates to $5.33 in Canadian funds.

On the other hand, any input that Canadian farmers buy from the U.S. becomes correspondingly more expensive as the value of our dollar declines. A $400,000 used combine in the U.S. would require $533,000 in Canadian funds to buy when our dollar is worth 75 cents.

Even though some inputs are more expensive with a lower Canadian dollar, it's generally accepted that Canadian exporters enjoy a net benefit.

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Farm Credit Canada - Financement agricole Canada

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How global currency and the Canadian dollar impact agriculture | FCC

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Our trade surplus or deficit with other nations has a significant influence on the Canadian dollar. For example, a higher price for crude oil leads to an appreciation of the loonie. Interest rates also have an effect. How often have you heard this statement?

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This video focuses on how the exchange rates affect Canadian global trade exports, mainly agriculture. The presenter explains that the value of the Canadian dollar affects the prices Canada can charge for crops and livestock. Whenever the market price of the loonie drops vers the US dollar, the value of our exports increases. This increased value to our exports results in more business for Canada since our foreign buyers are getting a better price. Considering that Canada has a long-standing relationship with the US, changes in the market price of the loonie do not significantly affect our trades with the US. The presenter concludes that the market price of the loonie can affect Canadian trade in the short term, but since our exports are very diversified, there are not many changes to our revenue in the long run.

This video taught me the importance of global trade and why it is crucial to establish strong trade relations with other nations. On the condition that there is a significant drop in the loonie, strong trade relationships with other countries will allow us to continue profiting from our exports without seeing a massive reduction in the revenue generated.

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Exchange Rates and their Effect on Canadian Exports

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J.P. Gervais, explains the relationship between exchange rates and Canadian exports and why Canada remains competitive despite the declining dollar.

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This article describes how large world events (such as wars, financial crises, and pandemics) affected the exchange rate of the Canadian dollar. Canada's entry into the Second World War caused the loonie's value to drop compared to the USD and GBP. Canada could not implement a recovery strategy until the war concluded. The arrival of the Covid-19 pandemic caused traders and investors to acquire USD to reduce their risk of exposure. Subsequently, the value of the loonie continued to drop against the safe-haven currency, the Swiss franc, and the Euro. Nevertheless, the loonie continues to recover from the effects of the pandemic and regain ground on other major global currencies.

I chose this article because it thoroughly explains how the Canadian dollar continues to be resilient despite multiple crises. Even though it is not the most preferred currency, the loonie continues to be a reliable asset during times of financial calamity.

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How World Events Impact The Canadian Dollar (CAD) - FXCM Markets

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Read about the impact that world events have on the Canadian dollar, from the Civil War to modern events like the COVID-19 pandemic.

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(Video is within the article)

This video focuses on the importance of oil concerning the value of the Canadian dollar. Although there are four main factors of influence, crude oil prices maintain the most substantial factor in the market price of the loonie. When the price of Canadian oil increases, the cost to our main consumer (the US) also increases, thereby increasing the market value of the loonie vers the USD. Crude oil is Canada's most important good or service export since it accounts for ten percent of our foreign earnings. Therefore any increase or decrease in the price of crude oil will affect the value of the Canadian dollar and Canada's earnings from exports.

I chose this video because it explains the importance of crude oil in Canada in more depth. Crude oil is Canada's most valuable export, and it helps the loonie maintain a respectable position within the market. Without crude oil, Canada would have less valuable goods for trade, and it would diminish the earnings that we receive from exports.

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The exchange rate between Canada and the U.S. is often strongly correlated to the price of oil. Over the long run, when the price of oil rises, the value of the Canadian dollar (also called the loonie) also usually rises relative to that of the U.S. dollar. That correlation can be directly attributed to the way Canada earns most of its U.S. dollars-from the sale of crude oil-and the percentage of Canada's revenue that this constitutes.

Crude Oil and Canada's Foreign Exchange Earnings

The strong correlation between the Canadian/U.S. dollar exchange rate and oil prices is due, in large part, to the amount of the nation's total foreign exchange earnings that are garnered through crude oil sales. In 2019, Canada was the fifth-largest producer and exporter of crude oil in the world. Crude oil is the largest single contributor of foreign exchange to Canada, and its share has been increasing.

Canada is the largest foreign supplier of crude oil to the U.S. Canada accounted for 61% of total U.S. crude oil imports in 2020.

Supply and Demand

The price of any commodity or service is determined by supply and demand, and in the case of the Canadian/U.S. dollar exchange rate, the price is determined by the demand and supply of both Canadian dollars and U.S. dollars. Because crude oil exports account for a large portion of U.S. currency that's earned by Canada, movements in the price and the volume of crude oil have a significant impact on the flow of U.S. dollars into the Canadian economy.

When oil prices are high, the amount of U.S. dollars Canada earns on each barrel of oil it exports will be high. Therefore, the supply of U.S. dollars flowing into Canada will be high relative to the supply of Canadian dollars, resulting in an increase in the value of the Canadian dollar. Conversely, when the price of oil is low, the supply of U.S. dollars will be low relative to that of the Canadian dollar, resulting in a decrease in the value of the Canadian dollar.

The Future of Oil in Canada

We can understand the future of oil in Canada by looking at how much crude oil is available in established reserves.

Canada's oil sands are the third-largest proven oil reserve in the world. Oil sand is a mixture of sand, clay or other minerals, and water that occurs in nature. It also contains bitumen, a thick form of crude oil. Because of its density, the bitumen needs to be extracted in order to get crude oil. The International Energy Agency (IEA) predicts that oil sands production in Canada will rise by about 2.5 million barrels per day in the next 25 years.

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How & Why Oil Impacts The Canadian Dollar

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The exchange rate between Canada and the U.S. is often strongly correlated to the price of oil. Over the long run, when the price of oil rises, the value of the Canadian dollar (also called the loonie) also usually rises relative to that of the U.S. dollar.

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From the beginning of World War II until 1950, and again from 1962 to 1970, the value of the Canadian dollar was fixed in relation to the U.S. dollar. The Bank of Canada was responsible for intervening in the marketplace to maintain the fixed value of the currency.

Now, the exchange rate between the Canadian dollar and any foreign currency is determined by the forces of supply and demand, that is, like the value of any other openly traded good or service. Factors that increase (or decrease) demand for the Canadian dollar, or that decrease (or increase) demand for foreign currency, place upward (or downward) pressure on the exchange rate.

Factors Affecting the Value of the Canadian Dollar

Economic theory and empirical evidence have identified factors that, in isolation from one another, have predictable effects on exchange rates. However, predicting exchange rate movements is difficult because these factors interact at the same time. Often, the reasons underlying recent movements are evident only in hindsight.

The main factors known to influence the value of the Canadian dollar are:

Interest rates: Relatively higher interest rates in Canada increase foreign investors' demand for Canadian dollar-denominated securities. However, the rate of return of foreign investors is dependent on the expected future performance of the Canadian dollar. If foreign investors anticipate a decline in the value of the Canadian dollar, they demand a higher interest rate on Canadian dollar securities.

Commodity prices: The value of the Canadian dollar is correlated to the strength of world commodity prices. Commodities represent a larger share of exports in Canada compared to the United States and many other countries. When commodity prices rise, Canada's terms of trade improve because its goods have become relatively more valuable. Since Canada's effective purchasing power is higher, this movement is usually reflected in a higher exchange rate. The opposite also holds: weaker commodity prices can translate into a weaker Canadian dollar.

Inflation rates: Inflation is the rate at which general price levels rise over time. If inflation in Canada were to exceed foreign inflation rates, this would reduce the purchasing power of the Canadian dollar relative to foreign currencies. That reduction would be reflected in a relative decline in the value of the Canadian dollar. The opposite is also true. Sustained, relatively low inflation in Canada has a positive influence on the exchange rate.

International trade of goods and services: When a country has a trade surplus, exports exceed imports, putting upward pressure on the exchange rate (the demand for the currency exceeds the supply). When a country has a trade deficit, imports exceed exports, putting downward pressure on the exchange rate (the supply for the currency exceeds the demand).

Foreign investment and debt payments: Inflows of foreign investment in Canada increase the foreign demand for Canadian dollars, pushing the exchange rate up. Direct investment made by Canadians abroad has the opposite effect. Debt payments made to foreigners push the exchange rate down.

Productivity: A country's productivity - the amount of output that can be produced with a given level of inputs - can be a factor in the determination of the exchange rate through its effect on relative prices and international competitiveness. For example, if productivity in Canada were to grow faster than in the United States, the prices of Canadian goods would become more competitive and, over time, Canadian output and exports would increase, leading to greater demand for Canadian dollars.

What Explains the Recent Performance of the Canadian Dollar?

From January 2002 to November 2007, the Canadian dollar increased from a low of 62 cents U.S. to 1.04 U.S. dollars due to rising energy prices and strong U.S. demand for Canadian exports.

In response to the 2007 housing market crash, in September 2007, the U.S. Federal Reserve Bank reduced its target interest rate from 5.25% to an unprecedented level of 0% to 0.25% in December 2008. As the negative impact of the related 2008 financial crisis spread to other economies, the resulting economic slowdowns and contractions triggered sharp declines in both energy prices and the U.S. trade deficit. As a result, by early 2009, most world currencies, including the Canadian dollar, had lost most of their pre-2008 gains against the U.S. dollar.

In response, the Bank of Canada lowered its target interest rate from 3% in October 2008 to a historic low of 0.25% in April 2009 and maintained it at that level until May 2010. This significantly reduced the target interest rate difference between Canada and the U.S. at a time when energy prices and Canadian exports were rebounding. These factors in turn increased the value of the Canadian dollar from 78 cents in March 2009 to 1.05 U.S. dollars in July 2011.

With a target interest rate of almost zero and the implementation of a fiscal stimulus package, the U.S. economy gradually recovered from the 2008 financial crisis. This resulted in growing productivity and employment and an inflow of investments in the U.S. Since energy prices remained relatively stable, by comparison, the Canadian dollar slowly lost its appeal and dropped below 90 cents U.S. in early 2014.

In the two following years, investors' demand for U.S. dollar-denominated assets further increased as the U.S. economy continued to improve steadily while most other developed economies struggled to recover. The weak global demand for energy and excess supply from the expansion of oil and gas extraction techniques, particularly "fracking" in the U.S., reduced energy prices in early 2016 to their lowest levels since the early 2000s. Low energy prices, combined with the strength of U.S. dollar reduced the value of Canadian dollar to below 70 cents U.S. in January 2016.

Between January 2016 to June 2018, the slow but steady recovery in energy prices increased the value of the Canadian dollar from 70 cents U.S. to 76 cents U.S.
Author: Shaowei Pu, Library of Parliament (adapted from a publication by Michael Holden)
APPENDIX
Figure 1 - The Canada-U.S. Exchange Rate, U.S. Dollar per Canadian Dollar, 1951-2018
Note: The exchange rates are monthly averages. In 2018, only monthly data from January to July are presented.
Source: Figure prepared by the author using data obtained from Statistics Canada. Table 33-10-0163-01 Monthly average foreign exchange rates in Canadian dollars, Bank of Canada, and Table 10-10-0009-01 Foreign exchange rates in Canadian dollars, Bank of Canada, monthly, accessed 23 July 2018.
Figure 2 - Real Commodity Prices and the Canadian Dollar
Note: Commodity Price Index in January 2000 = 100. The exchange rates are monthly averages. In 2018, only monthly data from January to July are presented.
Source: Figure prepared by the author using data obtained from the Bank of Canada, the Bank of Canada commodity price index (BCPI); and Statistics Canada, Table 33-10-0163-01 Monthly average foreign exchange rates in Canadian dollars, Bank of Canada, and Table 10-10-0009-01 Foreign exchange rates in Canadian dollars, Bank of Canada, monthly, accessed 23 July 2018.
Figure 3 - World Currencies' Performance Against the U.S. Dollar, Exchange Rate Index
Note: Exchange rate index in January 2001 = 100. The exchange rates are monthly averages. In 2018, only monthly data from January to July are presented.
Source: Figure prepared by the author using data obtained from the Board of Governors of the Federal Reserve System (US), U.S. Dollar Exchange rates (monthly rate), accessed 23 July 2018.
Figure 4 - Target Interest Rate Spreads and the Canadian Dollar, 2008-2018
Notes: The target interest rate spread represents the difference between the Bank of Canada's target for the overnight rate and the U.S. Federal Reserve's target for the federal funds rate. Effective 16 December 2008, the target interest rate for the U.S. is reported as a range with a lower limit and an upper limit. The rates are midweek rates (Wednesday). In 2018, only weekly data from January to July are presented.
Source: Figure prepared by the author using data obtained from the Board of Governors of the Federal Reserve System (US), Federal Funds Target Rate, Federal Funds Target Range - Upper Limit, Federal Funds Target Range - Lower Limit, and Canada / U.S. Foreign Exchange Rate; and Statistics Canada, Table 10-10-0139-01 Bank of Canada, money market and other interest rates, accessed 30 August 2018.

Categories: Economics and finance

Tags: Canadian dollar, Exchange rate

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The Canadian Dollar: What Determines the Exchange Rate? - HillNotes

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From the beginning of World War II until 1950, and again from 1962 to 1970, the value of the Canadian dollar was fixed in relation to the U.S. dollar. The Bank of Canada was responsible for intervening in the marketplace to maintain the fixed value of the currency.

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This article focuses on the idea of exchange rates, what are dollar value means, and how the Bank of Canada is involved in this process. The markets set the exchange rate of the loonie, so the Bank of Canada can select its inflation rates. A stronger or weaker dollar can be positive for Canada, depending on our role in the economy. When the price of our raw materials rises, our foreign buyers get them for cheaper and vice-versa. The bank has an intervention policy, which only allows it to get involved in the event of a threat to the Canadian economy.

This article was very informative in explaining the importance of the subject of exchange rates and why they are important concerning the growth of the Canadian economy. I found it beneficial that this article explained how the bANK OF Canada is involved with exchange rates and how the positions of the loonie can affect our economy.

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Letting the currency float

If you travel, you know that sometimes you need to exchange more Canadian money to buy foreign currency, and sometimes you need less.

The value of the Canadian dollar rises or falls according to how much people in foreign exchange markets want to buy and sell it-that's what makes it float.

The Bank of Canada doesn't try to set the dollar's exchange rate. We let markets set its value. Because the Bank of Canada lets the Canadian dollar float, we can focus on setting interest rates to maintain inflation at 2 percent in Canada.

Demand for our dollar is affected mainly by demand for Canadian goods and services-the more people want to buy what we sell, the more our Canadian dollar is worth.

The strength of our economy relative to other countries also affects the dollar's value. Some specific factors that can make our dollar go up or down are:

our interest rates relative to other countries

our inflation rate relative to other countries

demand for our financial assets, like stocks and bonds

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The foreign exchange market determines how much the Canadian dollar is worth. At the Bank of Canada, we very rarely intervene to support its value.

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This video focuses on the importance of foreign currency and how it affects the Bank of Canada. The Bank of Canada holds several currencies in its deposit JPY, Euro, US Dollar, and GBP. These currencies serve as an insurance fund in case of a crisis concerning the market price of the loonie. Considering that the market price of the loonie changes every day, the government uses foreign currency to buy or sell Canadian dollars to stop it from rising or falling too quickly.

After watching this video, I learned the importance that foreign currencies have within the Canadian market. Acquiring a currency that has a higher value than the Canadian dollar will help offset any drastic changes in the value of the Canadian dollar. Consequently reduces the chances of Canadians seeing an increase in prices within the domestic market.

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Funds Management: Foreign Currency Holdings