Introduction
The performance of any currency depends on various factors in the economy. Some factors favor the value of the currency while others cause a devaluation of the currency. The monetary report released in July 2014 in Canada by the bank of Canada showed that the currency devalued due to the pressure from the Canadian and global economy. For instance, inflation is a major factor that has influenced the value of currency in Canada. The inflation devaluates the currency hence posing a challenge to the banking sector. Secondly, global expansion has also influenced the performance of the currency. This essay discusses how the Canadian economy and the global economy have influenced the performance of currency in Canada.
Canadian economy
The monetary policy report has revealed that high inflation in Canada has influenced the value of currency in Canada. In the past few months, inflation has grown by 2%. Initially, it was speculated that higher exchange rates could cause inflation for a short time but the situation worsened. The main cause of inflation in Canada is the high cost of energy, which increases the cost of production hence increasing the price of the products. Due to this, the bank recommends that it will take long for Canada to regain its full capacity. The level of inflation is expected to increase by 2% in the next two years. Low value of exports is another cause of inflation in Canada. The Gross Domestic Product has been estimated to be averagely 2.25% by 2016. The strengthening of the global economy will still devaluate the Canadian dollar. Some of the activities that will reduce the level of inflation include increased competition in the retail department and a steady increase in the capacity of the economy.
The report shows that core inflation increased by 1.6% from March 2013 to May 2014 while the monthly inflation has tremendously increased causing increase in price of goods and services. For instance, increased supply in North America has resulted in high prices of meat. The bank did not include some of the components like fruits, gasoline, natural gas, and vegetables in the calculation of core inflation. This is the reason why CPI inflation is higher than core inflation. One factor that has caused an increase in price of the consumer goods in Canada is high cost of import goods in the country. The low value of the exports has caused unfavorable balance of payment in Canada. Equally, the situation caused devaluation of Canada currency. Most of the firms have been affected by the high cost of imports since the situation raised the prices of the input resulting to increase in price of commodities.
Global economy
The global economy is another factor that has affected the currency in Canada. The report shows that the expansion of global economy has been uneven. There was favorable growth in the global economy in mid of 2013, which maintained the value of the currency. After mid of 2013, there was low economic activities that resulted to the devaluation of the currency. Some of the factors that led to retard economic growth in Canada are like fiscal consolidation and the private department deleveraging has reduced. According to the report of April 2014, the growth in global economy was expected to be 2.9% but various factors have held the growth back. For example, the investment activities and trade performed poorly hence affecting the cash flow in the country. For instance the Gross Domestic Product of US reduced by 2.9% because of temporary one-off factors like expiration of fiscal measures. In addition, there was uneven economic growth in Germany due to the reduced activities in the other countries. In some other countries, the businesses were affected by political instabilities that tightened financial conditions. These shortcomings from other countries affected international trade.