Explaining the Canadian-Dollar Effective Exchange Rate Index (CERI)

In October 2006 the Canadian-Dollar Effective Exchange Rate Index (CERI) replaced the C-6 index as the Bank of Canada’s new calculator in measuring its currency value against those of its key trading partners. The CERI is calculated based on multilateral trade weights, taking into account trade in goods and services, non-energy commodities and more current trade data than could the C-6 index, which used bilateral trade-weight determinates based on merchandise trade.

The CERI is able to reflect more recent trends in Canada’s international trade relations, such as increased dealings with China and Mexico and declined relations with Japan and Europe, and, incorporating both direct and third-market contest, projects a clearer outlook on Canada’s position on the world trade front. Though the U.S. dollar assigns significant weight in every index, the CERI also monitors the path of the Canadian dollar on U.S. excluded sub-indexes.

The CERI includes the six foreign currencies of the countries and/or economic zones that dominate Canada’s international trade: the U.S. dollar, the European Union euro, the Japanese yen, the U.K. pound, the Chinese yuan and the Mexican peso; as published by the International Monetary Fund.

Table A illustrates the weight each of these currencies has held from 1996 to the present date, as reflected in the CERI.

Table A: Currency Weightings in the CERI

a) These weights are applied to the CERI from 1996 to the present.

b) These weights are applied to the CERI before 1996.

CERI Formula

The CERI uses a weighting scheme that can consider percentage variances in both currency appreciations and depreciations symmetrically. An appreciation of the Canadian dollar will be represented by an increase in the index, while a decrease in the index conveys an effective depreciation. The index is set to 1992 = 100.

The formula used to derive the CERI is as follows: