How Is The Canadian Dollar Value Determined

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There is much buzz going around with the Canadian dollar with the significant spikes in value happening lately. It fluctuates and would rise in value higher than the US dollar then would go down the next day.

The value of the Canadian dollar depends on what people would want to buy more. It’s simple logic and math actually. This follows the laws of supply and demand. For instance, when judging foreign exchange markets, you will observe how people would buy and sell currencies. So, if people would want to buy more Canadian dollars in contrast to the U.S. dollar then the value of the Canadian dollar is bound to rise.

Comparison on U.S. Dollar and Canadian Dollar

The Canadian dollar is always compared to the U.S. dollar mainly because the U.S. dollar acts as the benchmark for all other foreign currencies. More so, the strong economic link between the United States and Canada also explains the constant comparison between the two leading currencies.

The value of the Canadian dollar is determined by the private transactions in a market. Hence, this currency is categorized under a floating exchange rate. In effect, the supply and demand worldwide on foreign exchange markets determines the CAD value against other currencies. The Bank of Canada does not have any direct influence on the value of its currency so as not to hurt its long-term value. The Bank of Canada only intervenes mainly to preserve order in the market which has happened before with the Asian Financial crisis.

There are different factors that affect the CAD exchange rate. This revolved around the supply of and demand for; plus the overall impact of the currency to the global market. This is recorded in the balance of payments or the transaction details between foreigners and Canadian residents. There is a receipt in every transaction which varies from that of financial capital to trade of goods and services to and from other countries. The exchange rate then of the CAD will act as a buffer between the financial transactions of Canadians and foreigners. Adjustments are made on these cross-border payments and would vary depending on the exchange rate or market foreign demand for the currency.

The two main factors that determine the Canadian dollar value are as follows:

  • Interest Rates. The high interest rates in Canada also attract more investors to buy securities to rake in even higher returns. The performance of investments would fluctuate from time to time but would depend primarily on future performance which also affects the interest rates altogether.
  • Productivity. The competitiveness and productivity of a country’s economy also determines the exchange rates to know whether the country has a wide market share in comparison to competition.

The intrinsic and external value of the Canadian dollar should ideally reflect the strength and robustness of the country’s economy.  Are we productive enough? How are the products and services at par with the rest of the world? Are buyers confident enough with Canadian products and services or the economy itself? These are just some of the factors that affect the buying and selling behavior of an economy.