Impact of exchange rate on the CAD (1 Viewer)

[BFF]

I am writing essay on impact of movements in exchange rate on the economy.

I am trying to understand if movements in the exchange rate effect the size of the CAD. I understand the effect of movement of the exchange rate on the BGS but as the CAD is largely because of the net incomes deficit how would appreciation of the dollar increase the CAD or is the reason because of the deterioration of the BGS?

 

[ilovecommunism]

回复: Impact of exchange rate on the CAD

this is generally know as "Valuation Effect"

if the value of a country's currency goes down, that means when the country's firms repay their payments to foreign lenders (including servicing cost), they have to convert more money into foreign currencies, and that will increase money outflow. vice versa, if the country's currency appreciates, there will be less money needed to be converted into foreign money.

 

[BFF]

Re: 回复: Impact of exchange rate on the CAD

Thanks

Do you think the "valuation effect' has had much of an effect recently. The $A appreciated but the incomes Deficit has kept increasing or am I oversimplifying.

 

[ilovecommunism]

回复: Re: 回复: Impact of exchange rate on the CAD

well... what I think is, as the AUS Dollar appreciates, foreign investors might feel more confident of the Aust economy, and the appreciation can also mean an increase in profit from investment, despite the cost by exchange rate (investors know how to calculate the difference...lol). so, they might invest more into Australia through either direct investment or portfolio investment. therefore, the positive effect of the valuation effect might be offset by the velocity of increase in the number of investments.

and the increase in demand for the Aus dollar by these investors might be another reason for the appreciation of the currency.

 

[redom]

well an appreciation has both positive and negative impacts on the CAD.

Firstly on the BOGS, an appreciation does make imports cheaper, but too makes exports less competitive. The effect of the appreciation largely depends upon how much demand for imports increases by and how much demand for exports reduce. It may have either a positive or negative impact. However, in general terms, using past statistics an aprreciation generally leads to a higher BOGS Defecit as import demand increases and too export income falls, as our exports loose international competitiveness. For Example in 2001, their was a small trade surplus, and in the same year our dollar was around the 50c mark from memory.

Secondly, on the major component of the CAD, the net income defecit an appreciation should reduce the value of money going towards servicing costs as our dollar buys more foreign dollars. This theoritically should mean an improvement in our CAD. (this is the valuation effect)

and now since im too lazy to discuss the impacts of a depreciation, ill just say...its preety much the opposite effects?......

but in general, a depreciation is likely to deteroite the cad and an appreciation is likely to result in an improvement, probably because the net income component is the major structural part of the CAD.

hope that helps!

 

[ilovecommunism]

回复: Re: Impact of exchange rate on the CAD

hmmm... what redom just said reminds me about one more thing: in theory, appreciation can also lead to an improvement in the balance of trade as exports worth more in the global market, and export revenue will increase. but it's more likely a theory, rarely "in practice", unless your exports are dominant in some areas.