Monday, October 20, 2014

Is the Depreciation of the Canadian Dollar Beneficial?

The Canadian dollar has sunk to 88 cents US, last week. That is a level unobserved since June 2009. An economic indicator much followed and commented, in Canada, at the beginning of this year is the exchange rate [here]. All started when the Canadian dollar lost 2.8 % of its value in the second week of the year.  Up to now, the Canadian dollar has been below its levels last year.

Canadian Dollar in terms of US Dollars, Jan 2 - Oct 15, Source: Bank of Canada
Figure 1: 1 Canadian Dollar in terms of US Dollars, Jan 2 - Oct 15, Source: Bank of Canada
Is this situation beneficial to Canada? In February, March, May, and July this year, the growth rates of Canada’s exports to the US were high compared to the same periods last year. The weakness of the Canadian dollar could explain this. Commodities made in Canada have become cheaper in the US, which benefits to the manufacturing sector.

Canadian Trade of Commodities with the US, Balance of Payments Data, January-August 2013 and 2014, Source: Statistics Canada
Figure 2: Canadian Trade of Commodities with the US, Balance of Payments Data, January-August 2013 and 2014, Source: Statistics Canada
The depreciation of the Canadian dollar had, as expected, a negative effect in January 2014 on imports from the US as commodities bought from the US became more expensive.   It also slowed down imports from March to May. The growth rates of imports from the US are lower in January, April, and July compared to 2013 due to the lower level of the exchange rate this year. Since the Canadian economy is experiencing economic growth, the effect of the depreciation of the Canadian dollar on imports is offset by the increase in the gross domestic product. The import of expensive goods from the US contributes to inflation.

As far as tourism is concerned, the depreciation of the Canadian dollar is not attracting US travelers as expected [here].