Understanding the Currency: CAD

Oil & The Canadian Dollar Are Closely Linked

Oil Barrell
The Canadian Economy is dependent on Oil.

Definition:

Currency Name: Canadian Dollar
Currency Country: Canada
Currency Symbol: CAD
Exchange: Interbank
Quote Style: USD/CAD 1.4000

Nickname: Loonie

Central Bank Name: Bank of Canada

Bank Governor: Stephen Poloz

Interest Rate: 0.50%

Correlations: The Canadian Dollar is highly correlated to other commodity currencies like the Australian Dollar and New Zealand Dollar. The Canadian Dollar is also positively correlated with the price of West Texas Intermediate Crude Oil.

 

Best Trading Times: The best trading time for the CAD is during the New York Trading Session in the US. That would be 7 AM to 4 PM Eastern time(1200GMT – 2100GMT).

Fun Fact: The Canadian Dollar is often referred to as “the loonie” because the 1 Dollar Canadian Coin has a picture of a Canadian Loonie Bird on it.

The Canadian Dollar is a particular currency in the G10 in two key respects. First, as a key trading partner to the economy of the world's reserve currency, the United States Dollar. Second, the Canadian Dollar has unique exposure to the energy sector of commodities, most notably Oil via the Tar Sands of Northern Canada.

As the Northern Neighbor of the United States, the Canadian Economy is perceived to be a beneficiary of economic growth that takes place in the United States. However, for the Canadian Economy to benefit, which would show in a supported or strengthened Canadian Dollar, the price of Oil must also be supported.

 

When the price of Oil is weak so often is Canadian Economy and the Canadian Dollar. In late 2015 the global benchmark for Oil, Brent Crude broke below the 2008 low due to dual concerns of over production from Oil Producers in the Middle and the Far East as well as a lack of demand. As the price of Oil fell, so did the value of the Canadian Dollar.

 

This dynamic of weak Oil prices alongside with strength of the US Dollar pushed the price of the USD/CAD currency pair above 1.4000 for the first time since 2004. 

Trading the Canadian Dollar

Once you understand the dynamics of Oil's effect on the Canadian Dollar, you can use that to understand what the Central Bank is wanting from the economy. You can also use the trend in Crude Oil to help you understand where the higher probability trades are in FX with the Canadian Dollar. 

If Crude Oil is exceptionally weak, as it has been throughout 2015, and is expected to be in the start of 2016, trader's can look to sell the Canadian Dollar against strong currencies like the US Dollar or Euro. 

When Crude Oil is exceptionally strong, as it was in 2009-2011, a trade can look to weak currencies to buy the Canadian Dollar against weaker currencies. During this period, EURCAD was a favored currency pair as the strong Canadian Dollar continued to strengthen relentlessly against the weakening Euro in the wake of the sovereign crisis. 

As you become more comfortable with the layout of the FX market, you will be able to pull together trading ideas in a similar fashion.