It was a big day for the Canadian Dollar as we touched .986 on the green back. The strong Canadian dollar is reflecting our current healthy fiscal position, high commodity prices and higher than expected Canadian factory sales data.

The Canadian dollar is climbing on strong economic indicators showing that our trade, sales and employment data is picking up pace. In fact, our economy has shown the strong growth in productivity numbers in 11 years, even though working hours remained unchanged.

While the recent pickup in productivity is welcomed, senior economists in the country are still concerned about sustainability as firms continue to increase hours and overall employment.

Meanwhile, Flaherty doesn’t expect the Canadian dollar to reach an uncompetitive level; reaching parity has been a concern for both Flaherty and the BOC. Flaherty announced to new agencies that dollar’s rise is based on other countries taking larger positions in our currency than ever before.

So let’s take a look at which factors drive the Loonies value:

Purchaser of our exports

Canadian dollars are bought when exporters sell their goods and services abroad, whether or not they bill in Canadian dollars, since exporters will usually convert their payment back to Canadian. So, the more we sell our products- mineral, oil etc.- to foreign buyers, the higher and higher demand for Canadian Dollars. (This is one reason why the BOC is less concerned when this factor causes the Loonies value to increase)

Foreign investors

When takeovers happen, the companies have to buy Canadian, increase demand for dollars in the FX world.  The same goes for investors looking to buy stocks, bonds or other investments. So well the Canadian market return excellent numbers, investors want to participate, increase CDN $ demand.

This category also reflects the US dollar loss of confidence in recent months. When investors sell US dollars and buy Canadian, our demand for the loonie goes up increasing the price. This however, causes concern for the BOC since this demand does not affect our economy at all, since we haven’t sold anything, created any jobs or income. Investors are simply holding less US and buying Canadian.

Canadians  Investing Abroad

When Canadian invest and lend money to foreign borrowers, they will earn interest and dividends. As a result, the Canadian Dollars will be purchased by the foreign borrower to pay interest and dividends to Canadians.

Speculators

And finally, there are those who purely speculate on currencies, buying low and selling high. This group will buy the Canadian dollar when they believe it is going to rise against the US, and if they are right will make some money. So if there are enough speculators, their buying will push up the loonies value, in a sense a self-fulfilling prophecy to the general belief that the Canadian dollar will rise. And if that general belief continues, more people will buy Canadian, pushing the value up higher. This also happens when they believe that the value will fall.

With Canada sitting with less debt than the US, investors are also viewing Canada as a safe way to bet on the US dollar, since historically they move in together over time.

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