The demand for Canadian oil has been going down, meaning that the current account, which is to say the value of our exports compared to our imports, is loosing value. It is because oil is a main export that the current account is being impacted so heavily and because of this loss, the demand for our currency which would be used to purchase that oil has gone down.
In comparison, the investing climate in the country suggests a change in the capital account, or the difference between the amount foreign firms has invested within our country and the amount we have invested abroad. Foreign firms have not been investing within our country, which has also decreased the overall demand for our goods, lowering the exchange rate.
In evaluation, we will see differing results in the devaluation of the dollar in the short and long term. In the short term, the decreased value of the Canadian dollar will gradually return to higher levels as lost oil exports are purchased by another country, as well as a gradual increase in the overall purchase of Canadian goods in the United States market, as the United States is seeing a relative increase in the purchasing power of their dollar. The increase in the value of the American dollar will also decrease the purchasing power of Canadian importers, and thus imports will also decrease on a short term basis. Thus the overall value of the current account will increase, as more income would be staying within the country, and it would become a larger part of the GDP. Comparatively, the capital account though will continue to decrease as the favorability of the Canadian market continues to slowly increase, as indicated by creeping inflation rates. The speed of the rising inflation rate suggests to possible investors that more income that could be attained elsewhere. They will not see Canada as the place to begin in investment, the value of external capital investment in the country will fall. These factors are why I see in short run, a very small increase in the Canadian dollar, as both of these two forces balance each other out.
In the long run, however, this minute recovery will continue to grow as the financial climate of Canada returns to pre-recession norm. The gradual return to the economic norm will improve capital investment as investors realize business opportunity in Canada, and therefore increasing the overall value of the capital account in overall GDP. Adversely though, the current account will not see positive change as the economy recovers because foreign customers will stop seeing Canada as the cheapest way to obtain the goods they want.
In conclusion, the falling exchange rate indicates a change in the current account and the capital account. The current account has been modified by a fall in the quantity of oil exports, while the capital account has been adversely affected by the poor indications that the economy is giving. The current account will right itself in the short term as oil exporters realign themselves to other customers in other markets, while inversely the capital account will not benefit as the investing climate would take much longer to fix.
In contrast, in the long run the investing climate will return, and thus the capital account and the exchange rate will soar, while the current account will suffer because of rise in trade costs. It is in this respect that the economy is being affected by the exchange rate.