The Canadian Dollar (CAD)

Canada is the world's seventh largest country. With many natural resources and a large services sector, the country has a GDP of more than US$1 trillion. In the past, Canada relied upon the exploitation of its natural resources. However, today, the North American country has a large services sector, which accounts for nearly 70 percent of its GDP.

Manufacturing and natural resources remain important for Canada as they account for 25 percent of its GDP.

Canada experienced an economic boom when the Canadian (CAD) was devalued against the USD. NAFTA also eliminated all trade tariffs among Canada, Mexico, and the US.

Exports

The Canadian economy depends on exports for its growth. A strong CAD will reduce exports since goods will be too expensive for foreigners. A weak CAD will boost exports and the Canadian economy.

Canada has five major export markets:

1. United States
2. Japan
3. United Kingdom
4. China
5. European Union

Imports:

A strong CAD will boost imports as CAD-holders will have strong buying power for foreign goods. This would hurt Canada's major trading partners, particularly the US. A weak CAD will encourage imports and boost the economy.

Canada has five major trading markets:

1. United States
2. China
3. Mexico
4. Japan
5. European Union

Canada's central bank is called the Bank of Canada (BoC). It is very closely tied to the government, primarily in the adoption of goals, but is also independent.

The BoC focuses on price stability through adhering to an inflation target set by the Ministry of Finance. Low inflation is the goal. This is reached through the short-term interest rates.

The Bank of Canada meets regularly to make announcements and discuss policy. It releases the quarterly Bank of Canada Review and biannual Monetary Policy Report.

The following information is important to know about the CAD as it affects demand for the currency:

• Canada is the world's 5th largest producer of gold and 14th largest producer of oil.
• The CAD is a commodity-linked currency. It is highly dependent on the price of commodities like gold and oil. In fact, there is a positive correlation between the value of the CAD and commodity prices.
• The US imports 85 percent of Canada's exports so the relationship with the US is critical.
• The CAD was popular for the carry trade with the USD.
• Cross-border mergers and acquisitions are very common between the US and Canada.

Important economic indicators that directly affect the demand for the CAD are:

1. Consumer Price Index
2. Gross Domestic Product
3. Balance of Trade
4. Producer Price Index
5. Consumer Consumption