Canada is an open economy and is an attractive investment destination for global investors. It is one of the largest trade partners of the US and a commodity based economy. However, Canada has a floating exchange rate policy that exposes foreign investors to many foreign exchange risks. Understanding the factors that affect the CAD rate will help businesses to devise a strong risk management strategy for business, which trade with Canada or have investments in Canada.
I have compiled a list of some factors that influence the CAD forecast.
- Oil Prices
Canada has the third largest oil reserves in the world and is the sixth largest producer of oil. Crude oil constitutes 10% of total exports of the country in value. It is the second most exported product from Canada, next to automobiles. Canadian dollar is known as a petrocurrency, since its value depends on the rise and fall of the prices of petroleum products in the international markets. Since the petroleum products are traded in US Dollars, the UAS/CAD rate is proportional to the rise and fall of international petroleum prices.
- Effects of US Economy
Canada is the largest trade partner of the US and hence the state of US economy affects the CAD forecast. Any changes in the monetary and fiscal policies of the US impacts the CAD. As per the bank of Canada, higher interest rates in Canada has positive impact of the CAD whereas lower interest rates in the US tend to weaken the Loonie.
- Global Economy at large
Canadian economy is a commodity based economy. It exports commodities such as wood, paper, petroleum products, automobiles etc. The state of global economy hence plays a significant role in the CAD forecast. Any weakness in the global economy or trade disputes between nations that disrupt the global economy affect the rate of the CAD. This phenomenon can be clearly observed in the current scenario, where the CAD benefitted by the Brexit deal and the resolution of trade disputes between US and China. Both these incidents has a positive effect on the global economy and hence also contributed to the strengthening of the CAD.
Oil prices, state of US economy and the state of global economy at large have a significant role to play in the CAD forecast. Businesses must consider all these factors to devise foreign exchange risk mitigation strategies while dealing with Canadian economy.