Representing one of the major economies in the world, the Canadian Dollar (CAD) is a crucial currency part of the Forex dashboard. Also called the Loonie Dollar, CAD has a special relationship with all other currencies due to its direct correlation with the price of oil.
Because oil has a robust inflationary component, all central banks in the world monitor the price of oil closely. Hence, for Forex retail traders, the CAD swings signal changes in inflation too.
For this reason, many look at the Canadian Dollar as being a leading currency. When paired with the USD, the world’s reserve currency, the resulting pair, the USDCAD, leads the entire Forex dashboard.
What Matters for the Canadian Dollar
The reason why the Canadian Dollar has a direct correlation with the price of oil comes from the nature of the Canadian economy. As an energy-driven economy, Canada employs numerous people in oil-related businesses, both in upstream and downstream projects.
It exports over seventy-five percent of its oil to the United States. Which, makes sense, giving that the two countries share a common border.
For this reason, trading the USDCAD is a tricky process. That’s especially true when jobs data from the United States and Canada is released.
Forex traders know that the jobs data comes out most of the times in the same day, typically the Friday NFP (Non-Farm Payrolls). It makes the USDCAD a pair to avoid trading as the conflicting data points to some unusual moves.
The following are essential when trading the Canadian Dollar:
- the price of oil and any news related to changes in oil supply and demand balance
- inflation or the Consumer Price Index (CPI)
- Bank of Canada press conferences (markets mostly know the interest rate decisions in advance as BOC makes sure to communicate them appropriately)
- job creation and the Unemployment Rate (most of the times released together with the NFP in the United States)
- Ivey PMI – one release that comprises the entire Canadian economy
- OPEC (Organization of Petroleum Exporting Countries) meetings
- U.S. oil inventories
The Canadian Dollar is a critical currency in the Forex market. It is one of the few currencies part of the Dollar Index (DXY), even though it doesn’t weigh much.
Because of its direct relationship with the price of oil the Canadian Dollar is closely watched by Forex traders. Out of all the CAD pairs, the USDCAD is the most liquid one, favored by traders due to the relatively low margin requirements it has.