The above table indicates the US to CAD exchange rate over the last five years. As observed, the FX rate has been operating anywhere between 1.271 and 1.3267 over the stated period. In other words, a USD/CAD rate of 1.3267 means that 1 US dollar is equivalent to 1.3267 Canadian dollars. The two countries use the Forex Market to establish the prevailing currency rate to trade over (House et al., 2019). It allows firms and business people from both US and Canada to capitalize on their currencies’ appreciation and depreciation. The FX rate between 1.271 and 1.3267 indicates that the two countries’ currencies have been relatively close to one another in value over the past five years.
As observed from the table of the average exchange rate, there is no single time the US’s currency dipped below 1.00 CAD over the given period. This implies that the US dollar has been more durable than the Canadian dollar. Resultantly, US citizens’ business and lifestyles have been impacted profoundly by the strong USD (House et al., 2019). For instance, when the USD was at its highest point in 2016 (1 US = 1.4559 CAD), a high importation of goods (mostly Oil) from Canada was recorded because they were comparatively cheaper. Additionally, there was an increase in labor outsourcing to Canada and the migration of manufacturing to help lower costs. The opposite happened in 2017 when the USD was at its lowest point (1 USD = 1.2108) within the chosen period. Many Canadian firms imported more from the US, and many Canadians were recorded going on vacation in the US since life was a bit cheaper (Berg et al., 2016). Additionally, most Canadians bought real estate in the US compared to any other year over those five years.
Mid Exchange Rate indicates the average rate between what the sellers of foreign currency are prepared to sell for and what the buyer is ready to pay, i.e., the exchange rate between a currency’s bids and ask rates. It was at its highest point in 2019 at which the price of currency was 1 USD at 1.3267 CAD. Conversely, the lowest point was in 2015, in which 1 USD was costing 1.271 CAD. In other words, the value of CAD was at its highest point during the time. The Canadian economy’s strength depends mostly on Oil, and it exports 99% of its totals to the US (Hashemi, 2017). As a result, Oil is referred to as a “commodity currency” of Canada. Therefore, the oil business is a significant factor linking the two economies, determining their currency exchange rate (Berg et al., 2016). CAD was much more robust in 2015 because of high oil prices, which led to rapid economic growth.
Therefore, Global Crude Oil Inventories is a significant factor that affected the CAD/USD over the chosen period. It shows the change in the total barrels of oil held in inventory to be sold in the future. A large stockpile of barrels forces Oil to go down and ultimately lower the value of CAD (BetterTrader.co, 2017). Extreme changes in the price of Oil were reported to hurt the Canadian economy during the five years. For instance, in 2017, the Bank of Canada announced that since the economy was recovering from the significant drop in oil prices, it could not raise interest rates (BetterTrader.co, 2017). This was done to prevent a recession as a result of rising interest rates to the normal level. Another issue that has affected Canada’s oil prices is increasing oil production in the US (Alzyoud, 2018). This forced Canada to decrease the volumes it produces, which raised the price of Oil, thus strengthening the loonie.
Another major factor that caused the fluctuation of the exchange rate within the selected period is Political Stability and Changes. Suppose a country is stable and in peace with the neighbors, its currency increases (Daelemans et al., 2018). The opposite is exact for a country facing political instability. The last US election of the year 2016 negatively impacted the two countries (BetterTrader.co, 2017). It was predicted that if Trump’s Republican Party won, there would be political instability, and the USD would rapidly lose value. He had threatened to end free trade by imposing tariffs (Daelemans et al., 2018). The effect of the predicted uncertainty saw the currency value drop from 1.3146 to 1.2993 between 2016, which was the year of the US election and 2017 when Trump assumed the office.
Natural Gas Storage also caused the exchange rate fluctuation within five years. A report on the amount of natural gas held under storage in the US is given weekly. It is a US indicator, but it negatively impacts the value of the Canadian dollar and its overall energy sector (BetterTrader.co, 2017). An increase in natural gas inventory beyond the expectation implies weak demand for oils and leads to a fall in oil prices (Alzyoud, 2018). Historically, the US is known to import most of its natural gas from Canada. Last year alone, the value of natural gas imported from Canada was the US $6 billion, and it totaled to 7.4 billion cubic feet per day. The high amount boasted the country’s economy, pushing the exchange rate to 1 USD at 1.3267 CAD.
Another reason for the exchange rate fluctuation within the given period is Economic growth for both countries. It is measured in terms of GDP whose formula is given by GDP=C+I+G+ (X−M); C represents Consumption by the consumer, I represent investments, G for government spending, and X-M for net exports. Therefore, it is clear that Canada’s GDP was higher when they exported large amounts of Oil to the US (Vovchenko et al., 2018). As mentioned in this context, net exports were high in Canada when their currency’s value was low (1 CAD=0.7536), as the two usually have an inverse correlation (Alzyoud, 2018). Conversely, the US’s GDP was very low in 2019 due to an exchange rate appreciation, which decreased the amount of net exports and raised the demand for imports from Canada.
Conclusion
It is important to note that the strength of the US government and its currency’s stability has attracted a high flow of foreign capital from Canada over the last five years’ time period. Economic and political forces are significant causes of USD/CAD fluctuation, on both sides of the border. The financial crisis has not hit the US within the five years, which has led to the increased strength of USD relative to CAD. The two neighboring countries show the impact of the exchange rate on each side through a change in business activities across the border, tourism, and lifestyles.
When the US dollar is at its peak, the citizens tend to import more goods from Canada and go on vacations there since life is comparatively cheaper there. The opposite is exact when CAD is at its peak in strength, leading to an increase in imports from the US. This is because a robust Canadian dollar can buy more US dollars, meaning that shopping and vacations in the US are cheaper. Global Crude Oil Inventories affect the price of oils in Canada and cause fluctuation in exchange rates with the US. Political stability in both countries also the same impacts on exchange rates. Other factors that cause exchange rate fluctuation include Natural Gas Storage and the GDP level, which measures the country’s economic growth.