Much to the delight of many Canadians, the Canadian “loonie” (Unofficial name for Canadian dollar) has seen a remarkable appreciation against the US dollar. Once derided as being the Northern Peso, the Canadian dollar has performed like a rock of stability against the weak US dollar.
The rise of the Canadian dollar is not a one off event. It has been rising from a low of 1.62 to $1 US to recently achieving parity. Part of the rise can be attributed to the weakness of the US dollar. In particular
- US Current Account deficit of over 6% of GDP
- US government deficit of nearly 6%
- Sub prime mortgage woes and corresponding decling in economic confidence.
- See also: Why Dollar has fallen
The Strength of the Canadian Dollar can be also attributed to many other factors:
Why The Canadian Dollar has appreciated.
Raw Material prices Strong demand for Canada’s production of natural raw materials like gas, oil, minerals and metals. A lot of this demand has come from the booming Chinese economy, with a seemingly insatiable appetite for raw materials.
- Current account surplus. Canada has currently a current account surplus of 1.9%. This is partly due to the strong demand for raw materials.
- Low Inflation. Inflation is currently 2.2%. It is forecast to fall to 1.8% in the next year.
- Prospects for Canadian Dollar
The dollar is likely to fall slightly. This is because:
- Price of Raw materials are likely to decrease following slow down in global economic growth.
- Decrease in Exports as Canadian exporters struggle to deal with the appreciation of the currency.
- Current Account Balance is likely to deteriorate. Some forecasts suggest it will fall into deficit by 2009
Despite these factors dragging down the dollar. Economic fundamentals suggest that the Canadian dollar. In particular, a remarkable feature of the Canadian economy is that the government have managed to maintain a balanced budget for the past several years. This places the economy in a strong position to deal with any economic downturn.