Exchange Rate

A price like any other

An exchange rate is simply a price. When the Canadian dollar trades at 75 US cents, one loonie buys 75 cents of American goods, and one US dollar costs about $1.33 Canadian. Like any price, it moves constantly with supply and demand: exporters selling US dollars for loonies, importers doing the reverse, investors moving capital across the border, and traders positioning around all of them.

The CAD/USD rate dominates Canadian life because the United States is by far Canada's largest trading partner and the destination for most Canadian foreign investment, but the same logic applies to the euro, the pound, or the yen.

What moves the loonie

Interest rate differentials. Money tends to flow toward higher yields. When the Bank of Canada policy rate sits above the US Federal Reserve's rate, holding Canadian dollars pays relatively better, which tends to support the loonie; when the gap runs the other way, the loonie tends to soften. Markets react to expected future rates as much as current ones, so a single speech can move the currency.

Oil and commodity prices. Canada is a major exporter of oil and other commodities, so when their prices rise, more foreign money flows in to buy them and the loonie often strengthens alongside. This "petro-dollar" tendency is a pattern rather than a rule, but it is strong enough that the loonie and oil prices often make the news together.

Risk sentiment. In calm, optimistic markets, investors reach for currencies like the Canadian dollar that are tied to growth and commodities. When fear takes over, money tends to rush into the US dollar as the world's safe haven, and the loonie often weakens even when nothing specifically Canadian has changed.

How the rate reaches your wallet

Groceries and imports. A weaker loonie makes everything priced in US dollars more expensive to import: produce in winter, electronics, vehicles, and countless inputs used by Canadian businesses. A sustained drop in the currency feeds into inflation at the checkout, usually with a lag of months.

Travel and snowbirds. For anyone wintering in Florida or Arizona, the exchange rate is effectively the price of the entire trip. A loonie that slides from 80 to 70 US cents raises the cost of every US restaurant bill, rent cheque, and golf round by about 14% in Canadian terms, without a single American price changing.

US-dollar investments. If you hold US stocks or ETFs without currency hedging, your return in Canadian dollars is the US return plus the currency move. A falling loonie boosts the CAD value of unhedged US holdings, and a rising loonie trims it. This two-layer return is the subject of currency risk, and it is worth understanding before you decide whether to hedge.

Floating rates and cheaper conversions

Canada lets its currency float freely, as it has since 1970, so the Bank of Canada does not target any particular exchange rate; the market sets it. And when you need to convert a meaningful sum yourself, remember that banks and brokerages build their fee into the rate they quote: techniques like Norbert's Gambit can convert large amounts at close to the institutional rate.