There’s no Forex trader that didn’t notice the strong relationship between the Canadian Dollar (CAD) and the oil market. The link is so strong that most of the times nothing else matters for the Canadian pairs.
Have you ever wondered why this correlation exists? What are the factors that drive it?
It all starts with the Canadian economy…
Canada – An Energy Driven Economy
A big chunk of the Canadian GDP (Gross Domestic Product – total values of goods and services an economy produces) comes from the oil industry. As a big producer and refiner, the Canadian’s economy depends on the oil price’s fluctuations.
Moreover, the energy sector employs the most people. As such, fluctuations in oil prices are not welcome.
When the oil price dropped from over a hundred U.S. dollars to around $30, where was the move felt first on the Forex market? On the CAD pairs.
The USDCAD reacted the most, reaching values that were unthinkable a few years earlier. 1.46 and something was the high, with an almost vertical move.
As such, we can say the CAD and oil enjoy a relationship. The rule of thumb says that when the oil prices fell, the CAD falls too. And, when oil is on the rise, CAD jumps as well.
This is important because it is a one-way street. It all depends on the oil prices, not on the CAD value.
For the Forex trader, it means that the USDCAD moves based on the Canadian economic news only when there’s no oil related data to be released.
What Matters for the Oil Market?
Because of that, the oil data is important. It gives a quick look into the supply and demand imbalances. And, it generates huge market fluctuations.
US oil inventories generate spikes in CAD volatility. Why?
Over three-quarters of Canadian oil exports go to the United States. In a way, it’s normal. The two countries share a border.
Moreover, the United States is the biggest economy in the world. Hence, it has a big appetite for oil products.
Therefore, the oil inventories levels in the United States generate fluctuations on the CAD pairs. When inventories rise, the assumption is that the United States won’t import that much oil from Canada in the future. Hence, this is bearish CAD, and bullish USDCAD.
On the other hand, when inventories fall drastically, the oil price jumps. Together, the CAD jumps too, and the USDCAD will trade with a bearish tone.
OPEC (Organization of Petroleum Exporting Countries) meetings end up with oil fluctuating aggressively. Therefore, make sure you know when the economic calendar tells such a meeting will take place. Until traders find out the outcome, the USDCAD and the CAD pairs, in general, will simply not move.
The USDCAD is one of the most difficult currency pairs in the Forex market. There are several reasons for that.
First, it is a major pair. After all, it has the USD in its componence.
Second, it considers oil and all is volatile.
Despite all these, the pair is one of the most illiquid currency pairs.
To sum up, the key to master the CAD in Forex trading is to know what matters for the oil market. The correlation degree between the two is so strong, that the USDCAD and oil charts are almost identical in their moves.