The value of the Canadian dollar has been falling in value recently against the U.S. dollar. The decline of the loonie is hitting levels not seen since 2004. In fact the loonie has lost 20 per cent of its value in the last two years, including a 7 per cent decline since May 2015 alone.
So, what causes the value of the loonie to change?
We have prepared a video explaining the drivers of the Canadian dollar to answer that question.
In the video we mention that two of the main drivers of the Canada-U.S. exchange rate are crude oil and interest rates. The declines in the Canadian dollar against the U.S. dollar have also been impacted by several other factors over the last year including:
- The decline in crude oil prices since July 2014
- The Bank of Canada’s interest rate cuts in January and July 2015
- The European debt crisis with Greece generated volatility and uncertainty leading investors to move to the safe haven of the U.S. dollar impacting all global currencies.
- The recent Chinese devaluation of its currency the Yuan which has devalued commodity currencies including the Canadian dollar.
We explained in the video that because most globally traded agricultural commodities are priced in U.S. dollars it is an important business strategy to watch the value of the Canadian dollar. As you develop and refine your marketing strategy throughout the year keep an eye on the Canadian dollar as it may impact achieving the prices you have outlined.
For instance, the U.S. Federal Reserve is expected to raise interest rates before the end of the year and as early as September. An increase in interest rates south of the border would cause the value of the Canadian dollar to drop further providing support to crop and livestock prices here. This would be positive as it should provide strong demand for Canadian agricultural commodities and agri-food products.
In our European debt crisis blog we indicated that currencies are the channel through which the Greece debt crisis will impact Canadian agriculture. As we stated in that blog post we believe the Canadian dollar will remain below $0.80 given current oil prices, the latest Bank of Canada rate cut and the possibility of an interest rate increase in the U.S.
The Ag Economic Team closely monitors the value of the Canadian dollar with our major trading partners to assess the competitiveness of Canadian agriculture and agri-food exports. As fluctuations occur throughout the year we will provide updates to keep you informed.
Leigh Anderson, Senior Agricultural Economist