Home > Oil and the Canadian Dollar – A Relationship to Remember

Oil and the Canadian Dollar – A Relationship to Remember

October 13, 2020 By Mircea Vasiu

Canada is blessed with natural resources. One of the most developed countries in the world, Canada is known for its democracy, multiculturality, or diversity.

The country is also one of the largest oil producers in the world. Moreover, the Canadian oil (and natural gas) industry is active in twelve out of thirteen Canadian provinces. In other words, oil is at the heart of the Canadian economy, responsible for a large chunk of the available jobs in the country.

Take Ontario, for example. Over 1,100 companies supply Canada’s oil sands with goods and services. Therefore, the oil industry is responsible for adjacent economic activity too.

Why do currency traders care?

CAD and the Price of Oil – A Positive Correlation

Whenever an economy depends on a single industry like Canada depends on oil, the currency’s value is influenced by it. As such, the Canadian Dollar (CAD), moves in a direct correlation with the price of oil. Should the price of oil decline, so does the CAD. Conversely, a higher price of oil leads to higher CAD.

Such dependency makes it difficult for currency traders to interpret the technical and fundamental aspects when trading the CAD pairs. On the one hand, there is the classic fundamental analysis involving the central bank, the interest rate level, and how the money supply affects inflation, etc. On the other hand, there is technical analysis.

However both pale in comparison to the oil’s influence on the CAD’s volatility. As a trader, you can have the stronger technical and fundamental case against or in favor of a CAD’s future market move, but you should always consider oil as a wild card that can ruin your thesis in a blink of an eye. In other words, when trading the Canadian pairs, currency traders must look at the oil price.

The last decades saw a greater share of renewable energy into the energy mix. That is encouraging, and the trend is likely to continue. But oil remains the main component, and things are unlikely to change many decades from now.

Understanding the oil market and what drives the price of oil is more important for CAD currency traders than anything. Often, the Bank of Canada altered the monetary policy due to changes in the price of oil, and not because of internal economic changes. It tells just how important oil is for Canada and the Canadian Dollar.