The Canadian dollar (CAD) is a commodity currency, for better or for worse. This means that global traders view its worth in terms of the commodities produced within the Canadian economy: gold, timber, silver, nickel, potash, wheat, natural gas and, of course, oil.
By far the most strong correlation with the value of the Canadian dollar, however, is oil price. Historically speaking, when the price of oil rises, so does the Canadian dollar. When oil prices fall, the Canadian dollar falls. It’s an unfortunate representation of the Canadian economy, which is much more varied and productive than oil prices, but in relation to the American dollar, you can see what might be most valued within the Canadian economy: oil, even if it is scraped from the bottom of the oil sands barrel.
What Makes The Loonie Rise and Fall Against the US Dollar (USD)?
The Canadian dollar (loonie) is back up again today (Sept. 4, 2009) to 92 cents American (USD). Yet oil is still at its sunken price of $67.79. Just two weeks ago it took oil prices at $72 (breaking through the $70 barrier) to push the loonie up to these USD levels. So what’s happened? Why is the loonie higher again, even when oil prices have fallen below where they were two weeks ago?
Other factors influence the value of the Canadian dollar besides oil. If there is intrinsic weakness in the American dollar, the loonie can rise in trading, since it is always perceived to have value as a proxy to oil and gold.
Lately, with the surge in gold prices towards $1000 an ounce, the Canadian dollar has risen back to its early and mid-August highs, around 92 cents USD. All this has happened despite oil trending downwards again in the midst of the September sell-offs and post-driving season. Oil broke down below $68, yet the Canadian dollar shot back up to 92 cents. Why? Gold prices, obviously. Canada has some of the world’s largest and most productive gold mining companies, like Barrick and Goldcorp.
Forecasting the Exchange Rate Relationship Between CAD and USD
How can you tell when will be the best time to buy US dollars? Or buy Canadian dollars? When will the Canadian currency go up again?
There are two factors largely at work here: “risk appetite” and natural demand. Natural demand simply pertains to the global need for Canada’s resources. Coal shipping, potash processing, and gold mining. The run-up in potash prices in 2007-2008 sent the stock of Potash Corp. soaring as the “China story” caused increased investor sentiment. And in fact, China has been buying more Canadian resources, as well as stakes in Canadian resource companies.
Risk appetite is probably the largest factor involved in predicting the CAD-USD relationship. When the U.S. stock market is booming, or on any upward trend, expect the Canadian dollar to climb higher (one to two cents) based on the so-called appetite investors have for a “risky” currency (perceived by some as “risky” because it is perceived as so closely tied to commodity prices, which comprise the most volatile sector).
As we saw with the recent recession of 2008, however, when the U.S. stock market tanked, investors fled to the greenback for its so-called “safe haven” status. “Safe,” because it is the world reserve currency and global players can’t drop it if they want to buy oil (which is denominated in dollars).
So then next time we’re in a bull market, and especially when oil prices themselves go up as a result of increased global demand or heading into the “driving season.” (May-Sept.), expect the loonie to rise. But expect it to rise due to negative factors, as well, not intrinsic to the loonie itself: such as when the U.S. dollar slumps of its own accord.Related Posts
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