The Canadian Dollar over the First Half of January 2014

The Canada-US exchange rate, i.e., the value of one Canadian dollar in terms of the US dollar, has risen today after losing 2.8 % of its value last week. One Canadian dollar, today at noon, was worth .92 US$. 

On  January 6, 2014, the Canada-US exchange rate  moved from .9422 to .9382. Four days later, one Canadian dollar was traded against .916 US dollar. This latter level of the Canada-US exchange rate has not been observed since September 25, 2009.  See below the graph daily Canada-US exchange rate over the past seven years.

Canada-US Daily Noon Exchange Rate, January 2, 2008-January 13, 2014, Data Source: Bank of Canada

Over the sample period, the lowest value of the exchange rate, which is .9063, was observed on September 3, 2009 and its highest value, 1.0583, occurred on July 26, 2011. Its average value is .963.

When the Canadian dollar was falling last week, the overnight money market rate continuously fell from its level of 1.0016 % on January 3 to settle at 1.0001 % on January 9. The overnight money market rate, which is the Bank of Canada’s policy rate, is the interest rate applied to interbank day to day lending. A fall in this policy rate also occasions a fall in other short term commercial rates including the bond and Treasury bill yields. This renders investing in Canadian assets less and less attractive for foreign investors, reduces the demand for the Canadian dollar, and lowers its exchange rate.  

Also note that the Federal Reserve Bank’s key policy rate, the federal funds rate also fell from .08 to .07 on January 7.