As monetary stability might be affected when a big player gets into difficulties, central banks should be in a position to form a view if a certain institution is illiquid or insolvent, and if the latter is the case, whether this institution is of systemic importance or not.
This implies a potential appreciation of the Canadian dollar vis-à-vis the U.S. dollar over time, if the inflation differential persists. But other factors also tend to favour a stronger Canadian dollar. First, deficit reduction by Canadian governments has eased the uncertainty that had pervaded financial markets, thereby shrinking risk premiums in interest rates and reversing the currency weakness caused earlier by these premiums.