U.S. Energy Prices and Canadian to U.S. Exchange Rate
5. Canada is one of the largest oil exporters. Result from data shows how energy prices in the U.S. influences the value of Canadian dollars to one US dollar. The study shows a strong relationship between U.S. energy prices and Canadian to U.S. exchange rates which suggests movement in energy prices serves as a forecast for the Canadian dollars.
From the graph, energy prices expressed in U.S. Consumer Price Index and the value of Canadian dollars are positively related. Energy prices has been increasing significantly over the years but falls from 2008 to 2009. The sudden drop in energy prices is caused by the aftermath of the 2008 financial crisis. During that time, U.S. economy comes to a halt and investment activities are deficient. There is minimal demand for energy required in constructions and investment projects. Production outputs also falls as consumer spending decreases drastically. Supply of energy is greater than demand for energy in the U.S. market, leading to a fall in energy prices. On the other hand, the Canadian dollars depreciates since Canadian currency is highly correlated to the energy prices. Also, many oil production firms suffer severe losses which in turn stifles economic growth in Canada.
Energy prices increases after 2009 and remains steady after 2011. Similarly, Canadian currency rises after 2009 and slightly decreases after 2011. The recovery of the global economy may lead to an increase in energy prices after 2009. During the same period, the U.S. government adopted different kinds of policy instruments to stimulate the poor economy. Besides, growing demand of oil from China has also driven up oil prices. China has vastly developed its manufacturing sector to boost economic growth in the last decade. The prodigious consumption of oil has caused global oil prices to surge. However, due to increasing concerns about environmental problems, China’s demand for oil has declined in recent years. Although energy prices in the U.S. remain unchanged after 2011, the lower demand for oil causes Canadian dollar to fall.
However, oil prices is not the only factors affecting exchange rates. For example, interest rates can impact the strength of Canadian currency. When interest rates in Canada are higher than that in the U.S., Canadian stocks and bonds become more attractive to investors because the rates of return are higher. As a result, demand for Canadian dollar increases which leads to an upward