Canadian Dollar Likely to Fall Further Against US Dollar

Have you ever seen someone make a mistake and not only do they suffer for it but someone else does as a result also? Well, this is exactly what’s happening to Canada right now.

You see, most of last year, you could say that the Canadian dollar was falling because of falling commodity prices. Since Canada exports so many widely used commodities like oil and lumber, when prices fall, so do their profit margins. It costs them about the same amount to produce the product but what they can get for it in the market is determined by where those commodities are trading at the time. Click on the chart below to enlarge it.

USD/CAD Pushes Towards 1.30 Once Again!

Last Year the Commodities Crash Killed the Canadian dollar. This Year it’s the U.S. Economic Crash that’s Killing Them!

So that was what hurt them much of last year. Now we roll into 2009, and they get killed by another dynamic: the increasing slowdown of the U.S. economy!

For three months in a row now, the U.S. economy has shed around 600,000 jobs or more back to back! The unemployment rate seems to be going somewhat parabolic at this point. It jumped from 7.6% previously to 8.1% now.

On top of this, to buffer the blow of the slowdown, Canada’s central bank had to lower interest rates once again (to 0.50%) which put it at the lowest their interest rates have EVER been!

While this is a dynamic that will eventually be good for their economy, it hurts their currency right now for sure.

They also stated that they may implore “Quantitative Easing”. What the heck is that? Well, in simple terms it means that they will print money out of thin air and load up the banks with so much excess cash that they are more likely to lend money and thus spur economic growth.

While that may eventually give their economy a boost, it kills their currency. Why? Look at it this way. Anytime something becomes more abundant, it becomes worth less. Anytime something becomes scarce, it becomes more valuable. (This is why a Corvette in the 1960’s may have gone for $3,000 then and would sell for $30,000 to $60,000 today. These days, they are scarce…yet they weren’t back then).

So when the market is flooded with more money (Canadian dollars), that money gets devalued and is worth less. Therefore it takes more (Canadian) dollars to buy the same amount of goods.