Majority of trade in forex markets consists of seven currencies. Canadian dollar is one of most traded currencies in the world forex markets and is also used as reserve currency by some forex traders. Demand and supply play a major role in determining the exchange rate of CAD.
Apart from the forces of Demand and supply, there are around 50 factors such as interest rates, prices of commodities, political stability etc. that play an important role in CAD forecast. Let us understand some of the important factors.
- Interest Rates
If the Bank of Canada keeps the interest rates high, investors from foreign countries prefer to invest in CAD denominated securities. The rate of return expected by foreign investors is proportional to the CAD forecast for the future. If there is a negative forecast, foreign investor may demand higher rate of interest.
- Commodity Prices
Canadian dollar is a commodity dependent currency, because Canada is the major exporter of commodities such as crude oil and petroleum products, forestry products, metals, minerals and precious metals. Any increase in the commodity prices of these items increase the rate of CAD. In the same manner, weak commodity prices may lead to a fall in the rate of CAD.
Inflation is the rate at which prices increase over a period of time. if the inflation rate in Canada is higher than the world’s average rate of inflation, it leads to a decline in the purchasing power of CAD and hence a negative CAD forecast. The opposite also hold true, wherein lower inflation in Canada when compared to the world’s average results in a boost to the exchange rate of CAD.
- International Trade Scenario
When Canada has trade surplus, its exports are higher than the imports which results in an increase in demand for the CAD. In the same manner, a trade deficit will put downward pressure on the currency and reduce its value.
- Foreign Investments
When there is high inflow of foreign investments into the country, there is greater demand for the currency and its value goes up. In the same manner, if Canadians are investing in foreign countries, the value of CAD will go down.
There are many other factors that are taken into consideration while determining the CAD forecast, like productivity, political stability in Canada and the US, major economic events in Canada and US etc.