International Trade: Currency Fluctuations

• Currency fluctuations are elements of international trade.
• One will be successful by listing the winners and losers of a high Canadian dollar, knowing the factors affecting the exchange rate, and doing simple currency conversions.
• This presentation covers:
• Exchange Rates
• Winners of a High Canadian Dollar
• Losers of a High Canadian Dollar
• Hard and Soft Currencies
• Currency Speculating

Exchange Rate

• The exchange rate is the amount of one country's currency in relation to another country's currency.
• The Canadian dollar (CAD) is most often quoted versus the U.S. dollar (USD).
• Canada and the U.S. are the largest trading partners in the world.

Hard Currency

• Hard currencies include the euro, U.S. dollar and Canadian dollar.
• These currencies are easily converted to others on the world exchange markets.

Soft Currency

• A soft currency belongs to a country with a small or weak economy.
• A soft currency fluctuates often and it is difficult to convert into other currencies.
• Examples of soft currencies include the Venezuelan bolívar and the Iraqi dinar.

Winners and Losers of a Low CAD

• Winners:
  • Exporters benefit when the CAD is low, making it more attractive for foreign businesses to purchase Canadian goods.
  • Canadian tourism benefits from a lower CAD, making it more affordable for tourists to visit Canada.
  • In 2016, American tourists spent more than $9.6 million when visiting Canada.
  • Canadian retail shopping in the U.S. becomes more expensive, benefiting Canadian retailers.
• Losers:
  • Importers find it more expensive to import and sell products in Canada due to increased production costs from importing expensive equipment, raw materials, and technology.
  • Canadian travelers find it more costly to travel outside.
  • Snowbirds may not stay as long because CAD buys less.
  • Major sports teams based in Canada employ sports players who pay in USD, thus it is more costly when the CAD is low to entice them to play.

Why CAD is Lower Than US

• A low price of is the reason Canadian export is weak causes a demand for CAD decline
• U.S. has threatened to implement protectionism which has the result of causing U.S purchase of Canadian goods to go down which results in a decrease in CAD
• Fear of housing in Toronto and Vancouver are too high and soon will decline affects the CAD

Currency Speculating

• Currency speculating is buying, holding, or selling foreign currency in anticipation of its value changing to profit from fluctuations in the price of currency.
• Tax-free shopping business Global Blue reported a 7% rise in spending for July as visitors from Asia and the U.S. found their currencies go further after the Brexit slump of the pound.
• Thus a PS4 which would have been 1.48$/£ or $370 before Brexit was only 1.2$/£ or $322 After Brexit, a consumer saved $48

Factors Affecting the Exchange Rate

• Economic conditions like inflation rate, unemployment rate, GDP, and interest rates influence the exchange rate.
• Trading between countries is directly related to import and exports and impacts currency exchange.
• Political tension, instability, or the threat of terrorism decreases the demand for a currency.
• Psychological factors like historical significance and stability change the way currencies are viewed.

Currency Conversion Example

• In 2008, a trip to Nepal cost $3000 USD, paid in AUD.
• The initial exchange rate was $1.00 AUD = $0.97 USD(paid $1000USD).
• For the remaining $2000 USD, the rate was $1.00 AUD = $0.63 USD.
• Paying the full trip at the initial rate would have cost $3092 AUD versus the $4204 AUD that was actually paid(paid $1112AUD extra).

Google Question

• China has been accused of manipulating their currency with its value decreasing.
• What are the pros/cons within China of doing this and why would a country like the USA oppose such a manipulation?