Understanding the USD to CAD Exchange Rate
In the article, we will review various aspects of the USD to CAD exchange rate. We start with a basic understanding and expand to review various other aspects of this important currency pair.
The Basics of USD to CAD
USD to CAD is short form for the exchange rate
between the US dollar and the Canadian dollar.
Each currency is identified by three letters internationally. USD is the US dollar and CAD is the Canadian
dollar. The value of 1 US dollar in
Canadian dollars is what is meant by “USD to CAD.” Currencies also often have nicknames. The Canadian dollar is sometimes referred to
as the Loonie and the US dollar’s nickname is the Greenback.
The USD to CAD exchange rate is a floating
exchange rate. This means that it is not
directly controlled by any government or central bank. Rather, it changes from minute to minute
based on market supply and demand for each currency. In the last thirty years, the USD to CAD
exchange rate has been as high as 1.60 and as low as 0.92. That is each US dollar has been as expensive
as 1.60 Canadian dollars and as cheap as 0.92 Canadian dollars. Currently, it stands near the middle of that
long-term range and is trading at around 1.26.
You can view the live USD to CAD rate at any time on various sites on the
internet.
The Importance of USD to CAD to Canada’s
Economy
The United States is by far Canada’s largest
trading partner. In fact, 75% of
Canada’s international trade is with the United States. The US dollar is also the world’s reserve
currency. This means that the majority
of the world’s central banks hold their reserves in US dollars. It also means that most international trade
is done in US dollars. For example, if a
Canadian company is making purchases in Korea, it is likely that the
transaction will be priced in US dollars and not Canadian dollars or Korean
Won.
Given the importance of trade with the US and
the importance of the US dollar internationally, the USD to CAD exchange rate is extremely important to Canada
and its economy. For example, as the USD
to CAD rate goes up (ie: USD gets more expensive) Canada’s exports become more
expensive on the international markets and therefore less competitive. On the other hand, as it goes up, it becomes
cheaper for Canadians to make international purchases (or travel overseas). On the other hand, as USD to CAD goes down,
Canadian exporters become more competitive internationally.
Factors Impacting USD to CAD
Ultimately, the exchange rate, like any other
price, is determined by supply and demand and perceptions about future supply
and demand. There are many USD to CAD forecasts available online. At any given point, the exchange rate is determined
by how many people are converting USD to CAD and conversely how many people are
converting CAD to USD as well as expectations about future supply and demand. In turn, the supply and demand for the
currencies are determined by a wide set of factors that influence supply and
demand at any given point in time.
One factor that impacts all currency pairs,
including USD to CAD is the interest rate differential between the two
countries. The interest rate
differential is the difference in interest rates in the US and Canada. Investors prefer to earn higher interest
rates on their holdings and so increases in interest rates in one country
relative to the other always drive up the currency in the moving country (and
vice versa). Of course, the interest
rate world is quite a bit more complicated and all those complexities go into
determining how they impact exchange rates.
For example, interest rates differentials could be different for interest
rates measured over different periods (the “yield curve”). Also, expectations about future interest
rates could impact exchange rates as well.
But the overall principal is that as a country’s interest rates move up
relative to another country, its currency increases in value.
Investors in USD to CAD pay very close
attention to any factor that might ultimately impact interest rate
differentials. For example, if Canada’s
employment picture deteriorates relative to the US, investors will surmise that
Canada’s interest rates may decline in the future and therefore the Canadian
dollar might go down in value relative to the US dollar.
There are of course many other factors that
impact USD to CAD. For example, one
major export in Canada is the oil. As
the price of oil appreciates, the value of Canada’s oil exports go up and
therefore the demand for the Canadian dollar goes up. In general, Canada is an exporter of
commodities so the price of any commodity tends to similarly impact the value
of the Canadian dollar.
The Bank of Canada and USD to CAD
Given its importance to the economy, Canada’s
central bank, the Bank of Canada, monitors the USD to CAD rate closely as one
of its metrics about the state of the economy.
While the Bank of Canada is not able to manage or control the exchange
rate, it does take the exchange rate into consideration when making decisions
about interest rates. For example, the
Bank may be concerned about moving interest rates up because it would increase
the value of the Canadian dollar and therefore make Canadian companies less
competitive in international markets. Or,
the Bank may view as the value of the Canadian dollar as being too low and
therefore potentially contributing to inflation.
Conclusion
USD to CAD is a measure of the value of the
Canadian dollar relative to our most important trading partner. The exchange rate impacts nearly all aspects
of our economic life in Canada. It is
important to understand the rate and follow it as it fluctuates over time.
.jpg)
Comments
Post a Comment