The supply of and demand for the Canadian dollar by the U.S. market

 

graph LR
A[Exchange Rate] –> B(Demand for Canadian Dollar)
A –> C(Supply of Canadian Dollar)

subgraph “Effect of More Rapid Growth in Canada than in the United States”
B –> D(Increase)
C –> E(Increase)
end

subgraph “Effect of a Rise in U.S. Interest Rates”
B –> F(Increase)
C –> G(Decrease)
end

subgraph “Effect of Goods Being More Expensive in Canada than in the United States”
B –> H(Decrease)
C –> I(Increase)
end

subgraph “Effect of a Recession in the United States”
B –> J(Decrease)
C –> K(Increase)
end

subgraph “Effect of Expectations of Future Depreciation in the Canadian Dollar”
B –> L(Decrease)
C –> M(Decrease)
end

– More Rapid Growth in Canada than in the United States: In the long run, with faster growth in Canada, there will be an increased demand for the Canadian dollar due to higher economic prospects, leading to an appreciation of the currency.

– A Rise in U.S. Interest Rates: In the short to medium run, an increase in U.S. interest rates will attract foreign investors seeking higher returns, increasing the demand for the U.S. dollar and decreasing the demand for the Canadian dollar, causing depreciation.

– Goods are More Expensive in Canada than in the United States: In the short run, as goods become more expensive in Canada, there will likely be a decrease in demand for Canadian goods and services, resulting in a depreciation of the Canadian dollar.

– A Recession in the United States: In the short run, a recession in the U.S. will weaken demand for Canadian exports, leading to a decrease in demand for the Canadian dollar and subsequently causing depreciation.

– Expectations of Future Depreciation in the Canadian Dollar: In the short run, if there are expectations of future depreciation in the Canadian dollar, investors may sell off the currency, increasing the supply and causing immediate depreciation.