An online article on Bloomberg on Nov 4th, 2014 reports that Canadian dollar’s exchange rate to US dollars has dropped to the lowest point in the last five-year period. The current exchange rate is 0.1 down from the most recent high of 0.97 back in 15/01/2013.
In accordance to the law of demand, Canadian dollars value dropped because there is less demand of Canadian dollars. This is due to the reduced demand of Canadian oil. Canada is one of the biggest oil exporting countries following OPEC, Russian, and Norway. Oil is the major energy source so when the global economy is not strong then the global need for energy is low.
Also the supply side of the oil industry has grown. New drilling techniques and fracking are producing more oil than ever before.
The combination of less demand and higher supply has reduced current price of oil. Oil price was 0.54 per barrel on 2014/05/28 and the current price is 0.25 per barrel.
Canadian oil is shale oil more expensive to produce then light sweet and more difficult to refine. When the market price is high profits can be realized in Canada. Likewise when the market price is low then Canada oil fields have to sell their oil at little or no profits and cannot stop producing regardless market price, due to the capital in use.
The profitability of the oil fields have helped fuel Canada’s economy and supported the strong CAD. Now in this period of retraced pricing on the oil market, the Canadian economy and exchange rate will follow. The CAD value can rebound when the oil prices go up.
My analysis is supported by the fact that Russian ruble also dropped. Russia is also a major supporter of crude oil in the world and Russian ruble’s value dropped because of the same reason. This is along with this the ruble value has protracted due to the issues in the Ukraine.
As a counter to this is that cross border trade could increase as the devaluation of Canadian dollar also influences the international trade between Canada and USA. Since the same amount of US dollars can exchange more Canadian dollars, the exporters will likely get more orders from our neighbor, and thus stimulate Canadian domestic manufacturing business.
Reference:
Picture-http://capitaltrustmarkets.com/canadian-dollar-targeting-99-100-yen