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The Share of Systemic Variations in the Canadian Dollar—Part II

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  • Jean-Sébastien Fontaine
  • Guillaume Nolin

Abstract

This analytical note examines how much of the systematic variation in the Canadian dollar is attributable to its sensitivity to commodity prices. We introduce a new “oil” portfolio that captures systematic variations when the exchange rates of commodity exporters and commodity importers move in opposite directions. We find that the Canadian dollar’s sensitivity to the oil portfolio has increased with the growing importance of commodities in the Canadian economy; this trend accelerated between 2007 and 2014. However, we find that only a small share of the depreciation of the Canadian dollar in 2014–15 can be attributed to the oil portfolio, even if this depreciation coincided with a sharp decline in oil prices.

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  • Jean-Sébastien Fontaine & Guillaume Nolin, 2017. "The Share of Systemic Variations in the Canadian Dollar—Part II," Staff Analytical Notes 17-1, Bank of Canada.
    • Handle: RePEc:bca:bocsan:17-1
    DOI: 10.34989/san-2017-1
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    References listed on IDEAS

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    1. Jean-Philippe Cayen & Donald Coletti & René Lalonde & Philipp Maier, 2010. "What Drives Exchange Rates? New Evidence from a Panel of U.S. Dollar Bilateral Exchange Rates," Staff Working Papers 10-5, Bank of Canada.
    2. Christiane Baumeister & Lutz Kilian, 2016. "Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us," Journal of Economic Perspectives, American Economic Association, vol. 30(1), pages 139-160, Winter.
    3. Jean-Sébastien Fontaine & Guillaume Nolin, 2016. "The Share of Systematic Variations in the Canadian Dollar—Part I," Staff Analytical Notes 16-15, Bank of Canada.
    4. Philipp Maier & Brian DePratto, 2008. "The Canadian Dollar and Commodity Prices: Has the Relationship Changed over Time?," Discussion Papers 08-15, Bank of Canada.
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    1. Jean-Sébastien Fontaine & Guillaume Nolin, 2016. "The Share of Systematic Variations in the Canadian Dollar—Part I," Staff Analytical Notes 16-15, Bank of Canada.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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