Understanding the Canadian Dollar: Factors Influencing its Strength and Stability

The Canadian dollar is one of the top ten most traded currencies in the world. According to 2018 data, it is ranked sixth.

Most traded currencies in 2018:

Position	Currency
1	United States dollar
2	Euro
3	Japanese yen
4	Pound sterling
5	Australian dollar
6	Canadian dollar
7	Swiss franc
8	Chinese yuan
9	Swedish krona
10	Mexican peso

The USD/CAD currency combination was the sixth most traded pair on the FX market in 2018.

Most traded currency pairs in 2018:

1. EUR/USD

2. USD/JPY

3. GBP/USD

4. AUD/USD

5. USD/CAD

6. USD/CNY

7. USD/CHF

8. EUR/GBP

9. USD/MXN

10. USD/SGD

Where is the Canadian dollar used?

The Canadian dollar is the country’s official currency. Canada is the world’s tenth largest economy and the ninth largest export economy.

Despite the fact that the Euro is the official currency of the Overseas Collectivity of Saint Pierre and Miquelon, the Canadian dollar is extensively used there as well. (It is a self-governing French overseas territory located off the coast of Newfoundland and Labrador.)

Short facts about the Canadian dollar

ISO 4217 abbreviation: CAD

Numerical ISO 4217 code: 124

Symbol: $ or C$

Central bank: Bank of Canada

1 Canadian dollar = 100 cents

Currency reserves

At the time of writing, Canadian dollars accounted for around 2% of the total amount of money held in national currency reserves. This tiny amount is enough to place the CAD among the top ten currency reserve currencies. So far in the twenty-first century, the CAD has occupied the middle area of this list (usually number five or six); the actual position varies from year to year.

Monetary policy

The Bank of Canada (BoC), Canada’s central bank, is in charge of developing the country’s monetary policy. It is Canada’s sole issuer of banknotes.

The Bank of Canada has no specific target value for the Canadian dollar against any other currency at the time of writing.

BoC is located in Ottawa, Canada’s capital.

Framework for unconventional monetary policy measures

After the global financial crisis of 2008, the Bank of Canada put forward a framework for the use of unconventional monetary policy measures to ensure that Canada’s monetary system remains intact during future financial crisis is.

The four main tools outlined in the policy document are:

• 1.) Forward guidance on the future path of the bank’s policy rate
• 2.) Stimulating the economy through large-scale asset purchases (quantitative easing)
• 3.) Funding to ensure credit is available to key economic sectors
• 4.) Moving the bank’s policy rate below zero to encourage spending

The bank’s 2009 conditional vow to keep its benchmark policy rate unchanged for a year if inflation remained unchanged during that period is one example of how it has utilized forward guidance in the past.

The Bank of Canada often performs medium-sized asset acquisitions, therefore the unconventionality of #2 is mainly about the magnitude of the purchases (large-scale rather than medium-scale).

Funding for credit is done to make sure that economically important sectors do not lose access to funding during an economic crisis. More specifically, the Bank of Canada is ready to provide collateralized funding to households and businesses at a subsidized rate as long as certain lending objectives are met.

Below zero interest rates on loans, also known as negative interest, is a tool already in use by several other central banks, including the European Central Bank and the Swiss National Bank.