Question

Does strong Canadian dollar indicate a strong Canadian economy? Explain in words how even if economy is weak in Canada, the Canadian value may appreciate and the opposite?

Answer 1

A stronger Canadian dollar takes place when there is a higher demand of Canadian dollar. It happens with the higher interest rate in the Canadian economy. The central bank of Canada (Bank of Canada) , puts higher rates when demand is strong and economy is doing very well. So, in general it can be said that stronger Canadian dollar reflects stronger Canadian economy.

Though, the Canadian dollar can appreciate when the Canadian economy is weak. It can happen when the central bank of Canada (Bank of Canada), starts purchasing its own currency to stimulate the demand of domestic currency. Further, attractive policies for the foreign institutional investors, increases inflow of capital to the economy of Canada. It will appreciate the Canadian dollar. The reverse is also possible, when a healthier Canadian economy, may have weak dollars and it can happens due to lower interest rates, devaluing of the Canadian dollar with the intention of promoting exports. It will lead to depreciating Canadian dollar while the Canadian economy is strong.