When the Chinese economy was growing in excess of 10%, it was buying commodities in record quantities. This translated into currency strength in commodity oriented economies such as Canada, Australia and New Zealand. As growth in the Chinese economy slowed, their purchases of resources declined. This resulted in declining Commodity prices, along with the resource based economies currencies.
The US economic recovery is slowly gathering steam. Rates in the US have already moved up and the bias is clearly to the upside. With Canadian economic growth slowing, interest rates in Canada are unlikely to rise as quickly as in the US. Higher yields on US assets make holding or buying the US Dollar a more attractive proposition for investors. Money on the margin migrates to where it can earn the highest risk adjusted return.
The US Dollar has been and remains the world's reserve currency. None of the events over the last six years has changed this. If anything, events have transpired to solidify the US Dollars position as the global reserve currency. This is especially true as it becomes increasingly evident that there is currently no credible alternative. Part of the reserve currency's functions is to provide stability for global investors. Post the financial crisis, governments around the world mandated that their banks invest in safer and more liquid bonds. US government bonds, and the highest grade US corporate debt fit this better than non-investment grade or illiquid foreign bonds. The US bond market is deep, providing ample liquidity for investors to get in and out of at a moment's notice.
Many countries around the world are incentivized to depress their currency to ensure the competitiveness of their export oriented industries. This is accomplished by countries selling the local currency and buying the US Dollar. This results in upward movement of the US Dollar which translates into a lower Canadian Dollar.
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