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The Share of Systematic Variations in the Canadian Dollar—Part I Staff Analytical Note English November Introduction In this analytical note we show that the share of the systematic variations in the Canadian dollar has risen significantly in the past two decades. Systematic variations in the exchange rate are shared with other currencies.
This parallels the equity market, where variations in the price of a given stock are shared with variations in the prices of other stocks. In the simplest case—the capital asset pricing model—the amount of systematic variations is given by covariance of this stock with the equity market index.
In the context of currencies, exchange rate variations that are systematic originate from common international economic or financial conditions affecting all exchange rates. Separating systematic variations is useful and essential to identify the effect of domestic economic news or policy decisions on the exchange rate.
Measuring Systematic Variations in Exchange Rates To measure systematic variations in bilateral exchange rates against the US dollar, Verdelhan introduces two global risk factors—carry and dollar—that account for a large share of exchange rate variations.
Both factors are constructed from currency portfolios. The carry factor corresponds to the difference between a portfolio of currencies with high short-term interest rates and one with low short-term interest rates.
The dollar factor corresponds to the equally weighted portfolio of exchange rates relative to the US dollar. Together, the contemporaneous variations in carry and dollar portfolios account for up to 80 per cent of daily exchange rate variations across developed countries, relative to the US dollar.
In fact, the Canadian dollar exhibits one of the lowest shares of systematic variations in a panel of 53 currencies. We argue that the low share of systematic variations of the Canadian dollar over the entire sample hides substantial changes over time. If Canadian dollar exposures to carry and dollar portfolios have increased, then the estimates based on the entire sample underestimate the share of systematic variations in the Canadian dollar today.
To check whether Canadian dollar exposures have changed over time, we use exactly the same model as in Verdelhanbut we estimate using five years of data, starting in and rolling this five-year window forward until the end of our sample. The share of systematic variations can be measured using the adjusted R2 from these rolling estimates.
The R2s reveal that systematic variations in the Canadian dollar have increased substantially over the sample period Chart 1. The R2 never exceeds 10 per cent before Between andthe Canadian dollar exhibited little common variation with carry and dollar portfolios.
In other words, the results suggest that essentially none of the Canadian dollar variations were systematic but instead reflected changes of economic or financial conditions specific to Canada. In contrast, systematic variations explain as much as 60 per cent of daily changes in the Canadian dollar exchange rate in recent years.
Almost two-thirds of the variations in the Canadian dollar are shared with the carry and dollar portfolios, reflecting the influence of international economic or financial conditions also affecting other currencies.
The share of systematic variations for the Canadian dollar has increased Note: Dates represent the last data point in the regression. We find that the largest contributor to the increase of systematic variations in the Canadian dollar is the growing influence of the dollar portfolio. The regression coefficient on the dollar portfolio rose from essentially zero for most of the s to 0.
A coefficient of 0 on the dollar portfolio—as in the early part of the sample—means that the Canadian dollar shared none of the average variations observed in other exchange rates relative to the US dollar.
Exposure to the dollar portfolio explains the higher share of systematic variations Note: Such a change in the exchange rate is historically significant—the Canadian dollar has not depreciated by as much over a similar horizon for more than 35 years.
The difference between this implied path and the actual behaviour of the exchange rate may be due to the impact of domestic news on the currency. We report results starting on 21 Julyat which point the Canadian dollar reached its post-crisis high: We perform an out-of-sample exercise from this point: Systematic variations explain most of the Canadian dollar depreciation Sources:INTRODUCTION TO THE STUDY: The study is about how the Rupee appreciation or Rupee depreciation against Dollar impacts the investors in Indian equity market.
The study details about the concepts of Currency fluctuations, Rupee appreciation and Rupee Depreciation. Depreciation of the Canadian dollar will d_____ the affected price of exports and cause exports to rise and imports too far. decrease Changes in the demand for the Canadian dollar comes from.
As the Bank of Canada is now catching up with the US Federal Reserve, rate hike expectations are rising accordingly. Monetary policy and the commodity bull market are two strong tailwinds supporting the Canadian dollar today. Long term.
In the longer term, the outlook for the Canadian dollar is more doubtful. Start studying MacroEcon.. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Search. Appreciation of the Canadian dollar will: Depreciation of the dollar will cause the value of Imports (M) to increase.
The Canadian dollar has depreciated these past few months. The recent dip in its exchange rate vis-à-vis stronger currencies was caused by a cut to its key interest rate by the Bank of Canada, as discussed in the previous part of this series.
Meanwhile, there are other reasons that have added to the decline in the loonie’s value. Introduction to Exchange Rates and the Foreign Exchange Market 1.
Refer to the exchange rates given in the following table. a. Compute the U.S. dollar–yen exchange rate, E, and the U.S. dollar–Canadian.