Hey Canadians, thinking about your next summer vacation? You might want to consider visiting our southern neighbours; it will probably be your cheapest vacation option! It’s been more than a year that our Canadian Loonie has been beating on the greenback and we have now reached the moment when most economists predictions will become reality: the elusive state of parity between the Canadian and US dollar.
Knowing that our dollar has strengthened over the past 18 months is great, but knowing why would really be helpful, don’t you think? There are actually several factors that determine why a currency is worth more than another. In this article, I will concentrate on what happened to our Canadian dollar compared to that of the US. Because our dollar doesn’t necessarily increase in value, the US dollar has taken a big plunge since 2008:
As Canada is in a relatively good economic situation, most foreign countries trust its administration and its capacity to pay back their debt. This is why they agree to buy Canada’s debt (i.e. Canadian Federal Bonds). Since these bonds are denominated in Canadian dollars, this increases the demand for our loonie and therefore, increases its value.
While most US banks were struggling with ABCP and other credit swaps evil products, our Canadian banks kept rolling and offering high dividends. The banking system is the core of any economy. If banks don’t run smooth, the entire capitalist system is on hold.
During the credit crunch crisis in 2008, the Canadian banking system proved that it may be conservative, yet was also one of the strongest banking systems ever created. Therefore, it has ensured economic stability and foreign countries are more likely to invest in economically solid countries.
Based on the first 2 premises, investments perspectives in Canada are pretty good compared to other countries. We have seemingly pulled out of the recession in a smooth, steady fashion and several Canadian companies are poised for healthy growth.
Besides Canadian banks, our resource industries (i.e. gold and oil) are benefiting from the emerging markets huge appetite for such products.
Therefore, Canadian and foreign investors alike have jumped at the TSX and are still considering investing a bigger part of their portfolios in Canadian business. As previously noted with bonds, the same principal is at work with Canadian stocks, driving demand for the Canadian Dollar. The currency is strengthened once again ;-).
If interest rates were to go up, we would probably see our dollar going past parity vs the US dollar. This could have the following impact:
– Some goods may be cheaper (i.e. reduce inflation)
– Our economy could slow down (i.e. decreasing exports)
– Our economic model could change a bit (i.e. not focusing on dealing with USA and look forward to agreements with other countries)
– Montreal Canadiens making more money as their players are paid in US dollars but they are making Canadian dollars revenues 😉
image source: meddygarnet
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