What are the underlying determinants of the demand and supply for Canadian dollars on the US dollar foreign exchange market?
The most important determinant of the demand for Canadian dollars is the degree to which Americans want to buy things from Canada. The more they want to buy Canadian goods and services, the more demand for Canadian dollars. This can happen because more Americans want to buy Canadian goods. It can happen because more Americans want to come to Canada as tourists. It can also happen if Americans feel that Canadian securities are a good investment opportunity. In all of these cases, Americans need to buy Canadian dollars to get what they want.
Conversely, the supply of Canadian dollars is generally determined by how much Canadians want to buy from the US. When Canadians buy from the US, they must use Canadian dollars to buy US dollars. This increases the supply of Canadian dollars in the US market.
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