Canada's Economic Position Relative to the US as Illustrated by the Monthly Average Noon Spot Rate

Source: Statistics Canada, CANSIM using CHASS, v37426 Canada; United States dollar, noon spot rate, average

This is an interesting chart to illustrate how international investors view Canada's economy relative to the United States since 1950. The relative stability between the two currencies from 1950 to approximately the early 1970's can be explained by the gold standard where Canada (and many others) pegged their currency to the United States greenback, which was in turn pegged to the value of gold. Under such a system Canada could not pursue an independent monetary policy (see trillema).

Since the end of the currency peg, the Canadian dollar has depreciated relative to the US$ for many reasons that will have to be further examined. Possible reasons include Canada's lower productivity growth compared to the US, or perhaps Canada's poor taxation policies and larger government.

The relative weakness of the Canadian economy (or strength of the US economy) peaked around 2001-2002. This could be attributed to the massive asset bubble in the US for technology stocks, where global investors were selling local currencies to buy the greenback to purchase technology stocks, forcing the US dollar upwards.

The relative strength of the Canadian economy was visible after 2003 as the government debt problem was seen as being under control. This was compounded by the massive US government debt being piled up to fight wars in Afghanistan and the invasion of Iraq.

At this point in time the two currencies are pretty well at par, similar to when the Bretton Woods agreement was enacted.