When Did The Canadian Dollar Surpass The US Dollar?

The relationship between the currency exchange pairing CAD:USD has seen substantial movements throughout our nation’s short history. Looking back at the past decade, it’s hard to imagine that the Canadian dollar ever carried more value than the US dollar. However, at certain points in time this was exactly the case. In fact, at a few moments in history (specifically WWII and the 1960’s) the Canadian dollar was pegged to the US dollar as a fixed relationship.

What can we quantify?

Nowadays, a wide range of economic factors are what determines currency exchange rates.  Upward and downward pressures on currency rates can somewhat reliably be explained by supply, demand, and any underlying aspects of these basic economic principles.

WHAT CAUSES THE DOLLAR TO FALL? WHAT CAUSES THE DOLLAR TO RISE?

While we can speculate on the direction a currency might move in – to some degree – by leveraging our knowledge of these factors, we’re highly unlikely to ever do it with perfect accuracy. Trying to predict with complete accuracy the future price of a currency is the same as trying to predict the stock market; in the majority of cases it often never works, even if your job involves trading currencies professionally. However, don’t let this information completely discourage you from making a conscious decision – these primary factors are still crucial to understanding where dollar value fluctuations stem from:

The National Rate of Inflation

Although inflation rates themselves are comprised of multiple influences, at a basic level inflation just refers to the gradual increase in the price of goods and services over time.  A high level of national inflation directly translates to having an abundance of Canadian dollars. And because there are so many Canadian dollars in circulation when inflation is high, the demand for one dollar is relatively smaller than in periods of low inflation, and vice versa.

Put simply, if a loaf of bread used to cost $3 but now it costs $5 for the same sized loaf of bread, the value of the currency has diminished.

Prices of Commodity Goods

At the national level, a very large percentage of Canada’s global export is made up of commodity goods. If the prices of these commodities lower, exporting will provide less value since the cost to acquire those commodities will likely stay the same. In other words, because Canada’s effective dollar return on economy-sustaining commodities is lessened, the country’s purchasing power is also weakened.

Federal Interest Rates

Since the Bank of Canada can determine the prime lending rate for the country, which affects interest rate offerings, they can effectively shift demand for the Canadian dollar. If foreign investors see rallying interest rates in Canada, they’ll likely want to acquire securities that are purchasable in Canadian dollars. However, external investors will only buy these Canadian securities if they have a positive future outlook for the Canadian dollar’s performance – if the value of the currency goes up, they would be more accepting of lower interest rates.

Global Trading

At times where Canada sits at a trading deficit, exchange rates become more favourable to foreign investors due to a lower Canadian dollar denomination. On the other hand, in a trading surplus Canada would be exporting more products than they are importing, which translates to more demand for the currency than there is supply.

National Economic Productivity

In simple terms, Canada’s productivity is just a matter of how much output they can stand to create with a certain amount of input. This affects our county’s competitiveness on a global scale, and therefore the degree of national productivity can have upwards and downwards pressure on the exchange rate. For instance, if Canada scales into becoming a highly productive country, it can afford to offer goods and services at lower costs to the consumer.

In other words, our competitiveness through efficiency would directly tie into larger quantities of exported products, which in turn would heighten the Canadian dollar’s strength.

Foreign Direct Investments

As more Canadian debt gets requested from nations abroad, the international demand for Canadian dollars increases, and vice versa. However, when foreign debt comes due and it becomes time for Canada to make repayments, there is downwards pressure on the exchange rate.

WHEN DOES THE CANADIAN DOLLAR BEAT THE US DOLLAR?

From the list above, it really all comes down to Canada’s ability to have more favourable economic conditions than the United States. At this current moment in time, the United States outperforms Canada when looking at the big economic picture, in addition to being backed by the internationally-reputable US treasury. Knowing this fact, there were still a few moments in history where Canada’s dollar was more favourable to investors.

Canada Takes The Lead

For a brief period prior to the 2007/2008 market crash, one Canadian dollar was worth more than one US dollar. This was a direct result of Canadian exports being in high demand from the United States at the same time when energy costs were rising. Obviously, this slight edge for Canada didn’t last long due to the sharp economic contraction from the crash which affected both parties.

Following this catastrophic event, both the United States Federal Reserve and the Bank of Canada lowered interest rates to roughly 0% in an attempt to re-ignite the economy. However, due to high energy prices and rebounding Canadian exports coupled with a similar target interest rate to the United States, Canada was momentarily performing the US in international business, giving it a stronger currency yet again.

The Ultimate Result

Of course, as the dust from the crash finally settled, the US economy managed to make a sharper recovery than Canada and eventually overcame the Canadian dollar.  By the end of the year 2014, the Canadian dollar was worth significantly less than the US dollar. And as energy prices gradually became lower and lower, Canada lost their economic advantage in that sector, and the US dollar climbed even higher.

If you’re considering when to buy USD in Canada, check out our article on the best time to exchange currencies between the CAD:USD pairing.