The Canadian dollar, otherwise known as the loonie is one of the world’s most respected currencies. The Canadian economy is stable and the country’s established democratic system of governance lends further credibility to the CAD as a ranking global currency. The CAD is heavily influenced by commodity prices, notably crude oil. The Canadian economy is reliant on its rich energy resources to fuel economic growth in the country. The IMF considers the CAD to be one of the top 5 most traded currencies in the world. In USD terms, the market share of CADs in the global arena amounts to $119 billion.
Unlike smaller currencies such as the ZAR, Brazilian real or the Hong Kong dollar, the CAD tends to be a lot more stable. It is considered a floating currency, and this means that the value of the CAD is not pegged to any other currency. It is allowed to find its own equilibrium level based on supply/demand considerations. This differs from the Chinese currency – the CNY – which is pegged at a fixed rate to the USD. Owing to its constantly changing level in the currency exchange markets, the CAD is subject to a degree of volatility. It has been noted that the Canadian dollar (CAD) can fluctuate anywhere between 5% and 10% during individual trading sessions.
What factors determine the value of the CAD?
Like all other currencies, there are a host of factors that can directly influence the value of the CAD. Foremost among them is the Bank of Canada. This is the monetary authority that governs the supply of CAD in the country. By way of interest rate adjustments, asset purchases or sales, the Bank of Canada can directly influence the value of the CAD. Other important factors that play a part in the CAD’s strength or weakness are economic data releases from Canada and its southern neighbor the US, as well as geopolitical uncertainty vis-à-vis crude oil. Intraday trading volumes with the CAD are subject to fluctuation based on economic data releases and other macroeconomic variables.
Between August 2014 and early 2015, the price of crude oil plunged on international markets. Since the Canadian economy is directly influenced by crude oil prices, the CAD hit multiyear lows. Recall that crude oil prices dropped to $45 per barrel from well over $105 per barrel in that time. This sent the Canadian economy into a tailspin as one of its most integral economic sectors had suffered dramatic losses. The CAD – the loonie – lost significant purchasing power as a result, and it has been reeling ever since.
The Canadian economy relies heavily on its crude oil exports to the United States and abroad to fuel its economic growth engine. With lower revenues derived from crude oil sales (owing to a glut of crude oil on the markets), Canada’s GDP growth rate has stalled. As at the close of trade on 13 May 2017, the CAD/USD pair was trading at 0.7294 (the 52-week high is 0.7902 and the 52-week low is 0.7251).
Guarding Against Declines: Making the Case for FX Transfer Accounts
The above figures mean that for every CAD $1, the cost is just $0.7294. Back in 2011, the two countries’ currencies were trading at parity. Given this volatility, it’s important to be able to safeguard the value of Canadian assets over time. Consider that a Canadian house that was worth $300,000 in 2011 would be worth just $218,746 today. This highlights the importance of having quick access to a reliable and cost-effective money transfer account to safeguard the value of assets by making regular transfers. Dollar-cost averaging is one of the most effective ways of protecting the value of assets when currency fluctuations come into play.
By transferring money out when a currency is weakening, that currency is being protected against further losses. Likewise, by buying foreign currency when the local currency is strengthening, more of the foreign currency is acquired for less of the local currency. These techniques have helped to generate significant wealth for many people over the years. The currency markets see volumes of $5 trillion per day in trading activity, and many traders are using trading accounts for dealing with these currency transfers. The USD is currently strengthening on the back of imminent Fed rate hikes. This means that all else being equal, the CAD may weaken slightly by June, making the case for USD purchases before the rate hikes kick in.