Growing world demand for Canadian goods or higher world prices for Canadian products both prompt a direct increase in aggregate demand in Canada. And both tend to cause an appreciation of the Canadian dollar. Put simply, when demand for our goods and services increases, our currency tends to appreciate. Conversely, when demand for our goods and services decreases, our currency tends to depreciate.
But not all exchange rate movements are Type One. Some movements, let's call them Type Two, reflect the rebalancing of portfolios in financial markets, which may have nothing to do with current demand for Canadian goods and services.1 One example of a Type Two movement would be a flight to so-called "safe havens" during an international financial crisis.