Why Does the Value of Our Canadian Dollar Matter?

Canada has what is termed a floating exchange rate, which means the value of our Canadian dollar fluctuates in the currency market depending on a number of economic factors within our country and the world at large. The decision to adopt a floating exchange rate was made in order for The Bank of Canada to focus on policies to stabilize prices to avoid inflation and maintain appropriate levels of foreign owned debt. Simply put, The Bank of Canada uses policy to keep inflation low, stable and predictable which allows us to achieve strong, sustainable economic growth. Since our country is a commodities producer, our trade can fluctuate dramatically as the value of commodities, manufactured goods and services change. Our floating exchange rate reacts to these types of price changes and absorbs some of the price shock.

Typically our dollar is measured relative to the U.S. dollar because the U.S. is our largest trading partner. But why is it a big deal? When our dollar is strong relative to the U.S. dollar (trades higher than the U.S. dollar) it means a shopping bonanza for Canadians, regardless of whether it is personal shopping or business-to-business transactions. The goods we import are basically on sale as every Canadian dollar gives us more purchasing power. With increased purchasing power goods we import become less expensive for consumers to purchase or for businesses to use to manufacture other goods. These manufactured goods can either be sold within our country or to international buyers. Overall, a rising loonie can mean our purchasing power and standard of living is increasing.

On the flip side our products or exports become more expensive to foreign citizens and businesses, which can mean a drop in the demand for our products as they become more expensive. A drop in demand means less profit for our businesses which over the longer term can mean a loss in economic viability leading towards labour force reductions, wage decreases and other negative economic impacts. So the rising loonie can mean a slowdown in growth.

When our dollar is weak relative to the U.S. dollar we feel it in a few different ways. Our exports become less expensive for our customers who benefit from getting things basically on sale. At the same time as long as costs remain somewhat relative we can see an increase in demand for our products, which can positively affect profit and we can see an economic boom. In these times commodity producers are often able to absorb some of the resources given up by non-commodity producers. Businesses that import goods however feel the crunch as their costs rise. On the consumer side cross-border shopping becomes more expensive as our dollar buys less. Generally we 'feel' poorer.

Through all of this The Bank of Canada continues to monitor our exchange rate in the market and continue its economic policies to stabilize our economy, moderate inflation and attract global capital.