External factors to keep an eye on in 2021
These are forces that will impact Canada outside Canada’s borders. These are decisions or events that are outside Canada’s control. Despite the United States is a country among other countries among the world but it has a significant impact on Canada in many aspects such as political, economical etc. so we need to consider specifically.
U.S can have an impact on Canadian dollar in different ways. Canada was always influenced by U.S political and economic decisions and/or events.
U.S. New President
With the new president in the U.S. many things could be changed and we all know how the U.S. president’s decision can affects Canada. President Biden is in the midst of putting his stimulus plan together however, when it’s released is another question. What was thought to be a walk in the park is now becoming more difficult. Republicans have indicated that they think the plan is too expensive, which is to be expected, but two Democratic members have indicated their displeasure as well. Given this, it is likely the plan will be released in March and not February. Once out, there will be a flood of cash into the U.S.economy causing the USD to get weaker against most currencies including the CAD. Consumer spending will increase dramatically, the U.S. economy should expand based on this.
Bank Interest Rates
The U.S. Treasury has indicated that it will keep interest rates low for as long as it takes and even in its January 27th announcement it said it was keeping its benchmark short-term borrowing rate anchored near zero and maintaining an asset purchasing program that is seeing the Fed buy at least $120 billion a month. This means that the Federal Reserve wants to keep extra cash in the U.S. economy, excess cash allows for more consumer spending and capital investment.
Impact of Covid-19
Covid-19 outbreak has had a major impact on almost everything in Canada and it still does. The scenario is the same with U.S. and one reason for the Federal Reserve’s stance is that even with the vaccines that are coming, the U.S. economy has started to slow and that Covid-19 will be staying longer than anticipated and its hardships will linger longer as well.This will allow the Fed to keep rates lower even if inflation starts to enter the picture, it wants to err on the side of keeping excess cash in the economy. This will cause the USD to weaken against most currencies including Canada.
Check the latest currency exchange rates
Canada like other countries is affected by economic changes around the world especially anything that changes the demand of the goods that Canada export to other countries.
Oil
As the world’s economies grow, commodities will become in demand, and although the “green initiatives” that western countries have planned to adhere are still on the table, the short term outlook is, countries need oil and other commodities however, despite the negative effects of the coronavirus outbreak on oil market at the beginning, demand is not going down while the whole world is still dealing with Covid-19. Oil is still one Canada’s largest exports and the price is expected to move up but not to highs of the recent past. That being said, oil’s share of the Canadian economy is not as large as it was and as each year passes its influence will wane as green initiatives take over, but not yet.
Agriculture
With growing economies come growing populations and with growing populations come growing appetites, and as part of the green initiatives come vegan food. Canada is one of the world’s largest producers of pulses. Pulses are edible seeds such dry beans, dry peas, chickpeas, lentils, and various other varieties. Not only do pulses help with a healthy lifestyle they also promote sustainable agriculture, as pulse crops help decrease greenhouse gases, increase soil health, and use less water than other crops. These will become more and more in demand. Exporters sell their crops in USD and subsequently sell the USD back into CAD, consequence, stronger CAD. Wheat is also a major factor but as plant based food products increase, pulses will grow exponentially. It is used in pet foods and that is growing “wildly”.
How does Canada’s economy affect its currency?
It’s not just outside demand for Canada’s resources that strengthens its currency. This year the Canadian government has stated that all Canadians that want a vaccine will have one by the end of September. This will hopefully provide incentive for Canadians and Canadian companies to invest in Canada, boosting its economy. More growth means more jobs, more taxes and most importantly economic stability and with that comes foreign investments. Economic and political stability are the two main criteria that foreign investors look at, and Canada provides this, but it will provide more of this as the year goes on.
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