The history of the Canadian currency has always had a bit of an intrigue to it. For years the many various Canadian provinces used different currencies at one and the same time, often creating a complex situation. The Halifax rating, the valuation used in most of the country for years, was replaced in 1841 by a gold standard based on both the British gold sovereign and the American gold eagle coins. However, this valuation was not adopted by all the provinces and only in April 1871, did the Canadian Parliament pass the Uniform Currency Act unifying the currencies of the various provinces and replacing them with a common Canadian dollar.
The gold standard was temporarily abandoned during the First World War and came to an abrupt halt on April 10, 1933. When Second World War began, the exchange rate to the U.S. dollar was fixed at C$1.10 = US$1.00 but was changed to parity in 1946. In 1949, the British Pound Sterling was devalued and Canada followed suite, returning to a peg of C$1.10 = US$1.00. Over the next few decades, Canada pegged the currency at numerous different rates against the U.S. dollar reaching a high of US$ 1.0614 on August 20, 1957. In 1970, the Bank of Canada allowed the currency's value to float which it has been doing ever since.
The USD/CAD relationship has fluctuated significantly over the years, with the loonie usually falling against the greenback. Surprisingly, on September 28, 2007, the Canadian dollar closed above the U.S. dollar for the first time in 30 years, at US$1.0052. On November 7, 2007, it hit US$1.1024 during trading, following an announcement by China that it would be diversifying its US$1.43 trillion foreign exchange reserve away from the U.S. dollar. However, by November 30, the Canadian dollar was once again at par with the U.S. dollar and on December 4, the dollar had retreated back to US$0.98, through a cut in interest rates made by the Bank of Canada due to concerns about exports to the U.S.
Exports
In fact, the issue of exports to the United States from Canada has always been an ongoing concern and continues to affect the economic status of both countries. In 2009 73% of Canada's exports went to the United States, and 63% of Canada's imports were from the United States. Since the 2008/09 recession, however, exports have struggled with a strong Canadian dollar and weak markets.
The CAD has been a safe haven for currency traders for some time now. But despite Canada's assurances that it had weathered the recent recession, the recently released numbers point in the opposite direction. Back in November, it posted a much larger than expected trade deficit of $940 million ($879 million), significantly wider than the $140 million shortfall forecast by market experts and the 23rd deficit in a row. In addition, exports to the United States, which comprised 75.3% of all Canadian exports in November, grew by only 0.6%. With imports rising by 2.0%, the result was that the trade surplus with the United States fell to US$2.75 billion from $3.08 billion.
In addition last week, the Canadian dollar plunged to its lowest in more than four years, dropping beyond C$1.10 per U.S. dollar for the first time since 2009 when the country was emerging from recession and was buoyed by banks that had remained in the black through the credit crisis. That's when Canada became a haven for the US dollar with what appeared to be the most solvent banks and the best real estate market around.
Low Exports, High Debt
What emerges now is the flip side of the coin. As other economies are improving worldwide, Canada's economy is plagued by its slowest rebound in exports since World War II, Canadians are maxed out with major household debt and the government seems to be focusing on abolishing budget deficits instead of initiating any financial stimulus packages. The CAD is no longer the sanctuary it was till now.
According to currency tracking by Bloomberg, the loonie has been the worst performer among 16 major currencies, depreciating 4.1 percent this year versus the greenback. Canada's benchmark Standard & Poor's/TSX Composite Index which rose 9.6 percent last year, straggled behind the 30 percent gain for the Standard & Poor's 500 Index, making it the third straight year of underperformance.
The U.S. takes in about 75 percent of Canada's exports. With exports accounting for 30 percent of Canadian output, the world's 11th-largest economy is now wrestling to radically increase shipments abroad even while the dollar falls and the U.S. economy gathers steam. Energy shipments have declined since 2011 while U.S. supplies have grown and metals exports have also fallen. Automobiles and auto parts consignments are little changed over the past year.
There remains some optimism however. In fact, the Canadian Central Bank said that "?stronger U.S. demand, as well as the recent depreciation of the Canadian dollar, should help to boost exports and, in turn, business confidence and investment." According to chief economist Douglas Porter of BMO Nesbitt Burns, policy makers are pleased by the loonie's slide. They believe that the loonie is still too strong and they welcome a lower currency, which they see as helping to drive exports through lower prices on goods sold in the United States. The CAD might have lost its status as the best haven around, but the outlook for the Canadian economy remains strong and positive.