Most consumers scratch their heads when they try to figure out currency values and often give up.Then when the interest rates come into the equation they head for the refrigerator.It is all too confusing.It can be but it doesn’t have to be confusing.
First, currency values are established by international traders and there are many factors that figure into the value of a currency including GDP, Interest Rates, National Debt to name a few.Combined they present a picture of economic and fiscal health to the international bankers.An election can drastically alter the value of a currency because fiscal tax and spend policies can change.Monetary policies can be affected and in fact, the head of the central bank in any country can affect the currency by simple changes in interest rates.
Recently, the Canadian Dollar has fallen in relation to the US Dollar; or has it?Certainly its value to the Greenback is less but in relation to many other world currencies it has held its own or increased.The primary factor in this is actually the subprime crisis that has fueled the credit crisis in various countries around the world.
What has changed is that there is going to be a change in fiscal policy in the United States regardless of the election outcome and it is assured to spur the American economy.The other factor has to do with banks around the world.
The debt exposure to the American economy from the subprime crisis is a very small percentage of its economy; actually in the region of 5 percent.However the same exposure to banks in other countries is taking up considerably more of their economy and thus weakening the value of their currency as their banks face problems with liquidity.This has been a major problem for other countries and the reason that governments are moving to shore up their banking systems.It has wreaked havoc in stock markets and commodities exchanges as investors are justifiably nervous.Companies rely on the markets as well as credit for their operating capital and with both being under fire, investors are shying away from corporate investments.The values of their investments could shrink instead of grow.
In the current economy, Canadians are saving but they too are nervous.They have seen their savings shrink in the past months and are concerned about investment.The bad news is that interest rates have gone down as the central bank tries to reassure the global community that it is acting to kick start the credit cycle.The good news is that consumers can safely invest their savings with a minimum of risk if they put their money into government bonds and vehicles such as Guaranteed Investment Certificates (GIC’s).They will not earn a great deal of interest but they will grow rather than shrink.By playing on the short term renewal, as interest rates change so will the rates on your GIC’s.The question of whether the rates will fall is anyone’s guess but your principle will remain intact.
Another side benefit to a lower dollar and lower interest rates is that manufacturing in Canada begins to look attractive once again.The cost of borrowing is lower and the cost of manufacturing is lower due to the lower currency.This could spur job growth and security in the longer term.This could be a long awaited boost to the industrial sector of Canada; one that is sorely needed.
As the economy picks up, so too will security in the markets and credit will become more available.Recessions are inevitable but the wise consumer will have saved for it and be able to capitalize on the growth that is sure to come.