Will Canadian Dollar Further Depreciate?

Caifu Magazine |
Posted: January 9, 2017 | Updated: March 16, 2017 at 2:59 pm

Canadian dollar continued to depreciate significantly in January. Although there was a slight rebound recently, the exchange rate between Canadian dollar and RMB dropped to 1 to 4.55. Many investors are wondering if the Canadian dollar will further decline, especially the Chinese investors who are speculating for a good opportunity to purchase Canadian dollars.

Since Canada mainly exports natural resources and agricultural by-products, and the Canadian dollar exchange rate is closely related to commodities, therefore investors can determine the trend of the Canadian dollar by judging the trend of the commodity market. In addition, the trend of the commodity market is not only closely connect to the global economy, but also to the trend of the US dollar.

The exchange rate between Canadian dollar and the US dollar was as high as CA $0.95 to US $1 in 2011, then it started to fall continuously. Ever since the commodity market plummeted over a year ago, the Canadian dollar has been depreciating rapidly. The raise in interest rates by the Federal Reserve exacerbated the decline in commodities, and the exchange rate between US dollar and the Canadian dollar once fell as low as CA $1.46 to US $1, though there has been a rebound recently.

With the raise of interest rates by the Federal Reserve, and the US dollar is becoming stronger while other currencies are falling in value, these are not only the background stories to the 1997 Asian economic crisis, but also the cause behind the falling commodity prices and the declining Canadian dollar. However, investors are skeptical about the cause because the world today has gone through a thorough change compared to the world in 1997, thus making it unlikely to repeat the history.

One major difference between the world today and that in 1997 is that the size of China’s economy today has surpassed the size of entire Southeast Asian countries combined in 1997. If China is the main cause today, then China’s ability to respond to an economic crisis is far superior than that of the Southeast Asian countries in 1997.

As for the analysis of China’s economy, the Western economists have seldom been correct in their predictions, mainly because they have never had an insightful approach towards China’s economy and its society. Their information regarding this world’s second largest economy, if based on media or even online media, is far from the actual Chinese economy.

It is difficult for investors to predict the true impacts of raising interest rates by the Federal Reserve, and the financial markets in US, Europe and Japan also have problems and risks equal to those of China. The fall of US dollar a while ago raised suspicions towards the prospect of the increased interest rates. In addition, investors need to consider another probability, that the Federal Reserve might cut interest rates and implement monetary easing policies again.

Currently, Japan, Europe and China are all implementing monetary easing policies. If the Federal Reserve is having difficulty to continue to increase of interest rates, then under the circumstance of an overall weak global economy, it will be unknown as how long the commodity market will remain suppressed. Once the price of the commodities goes up, the Canadian dollar will become strong.

Although the Canadian dollar has been on the increase, it is still at a low point regarding its past performance. Although investors are unable to determine the short term fluctuation, Canadian dollar is unlike to fall significantly, thus there is plenty of room for it to rebound in the future.