Let’s take a look at the Canadian economy and how this affects the usd to cad rate, both at present and, more importantly, in the future. As an affluent, high-tech industrial society, Canada today closely resembles the US in its market-oriented economic system, pattern of production, and high living standards. Since the second world war the country has seen impressive growth in the manufacturing, mining, and service sectors which has transformed the nation from a largely rural economy, into one which is primarily industrial and urban. Having said that, in the last twenty years Canada has developed a significant market in raw diamonds, with new reserves being found every year. Gold prospecting originally opened up the Northern territories, attracting a rush of prospectors and miners who staked their claims, built up towns, and then after several decades, closed up and left.

The last gold mine was finally closed two years ago. Today, three diamond mines are open in their place and more are planned, bringing a flow of cash to northern Canada and making the country the third-largest producer of diamonds by value, surpassing even South Africa. This booming industry is supported by the ice truckers who work throughout the winter season to haul the vast amounts of heavy plant and machinery across the frozen lakes, before the thaw sets in each Spring.  Each year the season attracts more and more to the region to take their chances, often called the ‘dash for the cash’ !!

As the second largest country in the world Canada has considerable natural resources spread across its vast territories, but over the last twenty years  these have become gradually less important to the overall economy, although they do support important secondary industries such as paper and pulp from the forestry industry, and oil and gas will become increasingly important in the future. The principle natural resources now include timber, oil, gas, and heavy metals such as gold, nickel and uranium, although gold is almost mined out at present.  With its major reserves of gas and oil in Alberta and British Columbia, Canada is one of the few developed countries which is a net exporter of natural fuels. More recently diamonds have been added to the list, with virtually all of these resources being exported to its US neighbour. Whilst fishing has long been a key part of the economy, like many other countries, this industry is now in long term decline. Only around 4% of the countrie’s population is now employed in these fields which account for approximately 6% of GDP.

In the last twenty years, Canada has re-invented itself and in the process reversed its economic fortunes turning recession in the 1990’s into spectacular growth, with an economy that has  grown more rapidly than any other developed country of recent times. This success can be attributed to several factors, not least the move away from farming, agriculture, and natural resources, into services and manufacturing, but one other factor must be recognised, and that is oil ( with gas to follow ). Canada has been climbing on the list of the world’s oil producers for years, and is currently the ninth largest exporter of oil worldwide. Since 2002, Canada has been the largest supplier of oil to its next door neighbour, and has been attracting a great deal of interest from the Chinese. Its forecast that by 2010, China’s import needs for oil will double, and match that of the U.S. by 2030. Currently, Canada is positioned to be the largest exporter of oil to China. This puts Canada’s dollar in an excellent position from a trading perspective for the usd to cad exchange rate.

Canada’s economy largely depends on the strength of the American economy, which still accounts for approximately 80% of its trade so any downturn in the fortunes of its nearest neighbour will have a significant impact on the Canadian economy. With the American economy facing a possible recession resulting from the current credit crunch, induced by excessive lending to risky borrowers in the sub prime market, this situation is already taking its toll as low-income households struggle to repay these loans. This in turn is having a devastating effect on the housing market with as much as half a trillion dollars in mortgages due to be re-negotiated in the next year. Many Americans will be forced to face sharply higher payments to keep their homes as repossessions soar. American businesses are also facing higher financing costs — closer to the historical norm but far different from the past three years when financing was cheap. Oil has breached US$100 per barrel, leaving less money in the hands of the U.S. consumer, but good news for Canada as a net exporter of oil. The only good news for Americans is the decline in the dollar against the currencies of its trading partners, including Canada which will help to boost exports and make imports less competitive with U.S. industry. The slowdown in the American economy is not the only possible bad news on the horizon as the European outlook is much the same. Many economists are forecasting only a 2% growth for 2008 in the EU.

The weak US dollar, coupled with lower U.S. housing demand, is reducing the demand for raw materials such as timber. In addition a world slowdown could affect energy and commodity markets, affecting not only Canada’s economic growth but also its currency, which has become much more sensitive to energy prices. While a Canadian dollar at 90¢US by the end of 2008 would be welcomed by Canadian exporters, a U.S. led recession would be a far worse outcome and have far reaching implications for the Canadian economy in the long term. So having looked briefly at the economy of Canada which I hope has given you a better feel for the effects on the usd to cad exchange rates, let’s look at how the economy is managed by the central bank and government, and their fiscal and monetary policy.