Canadian Dollar (CAD)



The Canadian Dollar, abbreviated CAD, is the currency of Canada.

It is issued by the Bank of Canada (BoC), and is currently on the eight most traded currencies in the world.

Thus, every serious FX trader need to know what makes the CAD tick.

So let’s jump in.

What Drives the Canadian Dollar?

Canadian Dollar price moves, primarily for two reasons:

1.    Monetary Policy of the BoC (Bank of Canada); and

2.    Oil price.

Wait, why oil price?

If you went through our USD page, you know currency prices are swayed by the state of the issuing economy.

Supply and demand drive currency prices.

Monetary Policy (the Central Bank) affects both variables by first influencing supply (then the market adjusts demand in response).

And the state of the economy influences demand (slow economy = slow demand of goods & services = slow demand for currency to buy such goods or services).

In Canada’s case, export of goods and services accounted for a whooping 31% of GDP in 2016 according to data by the World Bank.

This figure hasn’t changed much from 2009 (30%), and around 70% of those exports go to the United States alone.

Ok, but what about oil?

Oil is a powerful CAD driver.

Oil and gas represent about 8% of GDP.

But that’s so little!

It’s actually huge.

Remember that oil price is somewhat volatile. A big drop in oil price as experienced in 2015 (when petroleum lost half its price) would mean a huge difference.

Imagine suddenly losing 4% of GDP (all else equal, which is not a reasonable assumption).

While normal oil price shifts ain’t that crazy…

Note: thank God, we have commodity futures markets, where buyers and sellers can hedge price (manage risk by agreeing on a price beforehand).

More “normal” price shifts and dips in demand/supply do cause shocks in the Canadian economy.

If oil price is high and Canada is getting the $$$ flows from its exports, the economy is soaring and it becomes an attractive place for investors to park their money.

Canada’s Exports are very important.

But to do so, foreign investors have to purchase the Canadian Dollar (so they can buy Canadian goods and services, or just investment assets).

In anticipation of this increased demand, which will increase CAD price against other currencies (everything else equal), FX traders buy the CAD when oil price is strong.

Conversely, Forex traders short the Canadian Dollar when oil prices decrease.

Bear in mind, that exports (in $$) are made up of two elements:

1.    Price of the exported good or service.

2.    Volume of the exported good or service (# of units sold, basically)

Therefore, exports of oil are affected both by oil price and # of barrels sold (demand by foreign countries).

This means CAD rises with an increase in oil price OR an increase in demand from foreign nations buying Canadian oil.

The reverse is also true.

Don’t these effects counter each other sometimes?

Yes and no.

For our purposes, We only need to know when a shift in the oil market will impact CAD.

On the other hand, we’ve spoken plenty about how Monetary Policy drives price of a currency.

So we won’t go more in depth in this article.

Is CAD Always Driven by Oil?

No.

Not by a long shot.

Not even close.

Not a rule of thumb sir…

A currency will move based on the strongest sentiment around it.

For example,

If the Central Bank of Canada, the BoC, has just shocked the markets with hawkish monetary policy, traders won’t give a fuck about oil.

But if nothing else is going on…

And a strong shift in oil prices occurs…

Then traders will likely hold onto this shift to long CAD for the session, or for as long as the commodity stays strong.

Practical Tips for Trading CAD

Re-read the bold statement in the last section.

Done?

Great, now, how do you know oil is moving the CAD?

Check the news feeds.

If you hear CAD is strong based on strong commodities, you might have a trade in your hands.

But wait, won’t that be too late?

Not necessarily. You should try to pair a strong CAD with the weakest currency at the time.

Always pair Strong VS Weak

Or… a weak CAD with the strongest currency at the time.

After doing so, you need to check the charts for good support and resistance zones (or technical levels).

If price is already close to such a zone, you may be late.

But, you could find a pair which still has a way to go.

To get the highest chance of making pips, check this out early in the morning before North American traders start (before 8 AM NYT). Or before European traders start if you’re in that time zone.

Hope this was helpful.

See you soon,

Emil Christopher,

The Forex Economist

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