Although the Forex market increases each year its volume and promises a handsome profit to the trader, do not forget that the ease of access is immediately compensated by an increased degree of risk. After all, without possessing the necessary knowledge it is impossible to trade successfully. You need to know the determinants of movement of major currencies, and in this article we will discuss the Canadian dollar.
Code: CAD
Symbol: C$ or $
Banknotes: $5, $10, $20, $50, $100
Coins: 5¢, 10¢, 25¢, 50¢, $1, $2
80% of all the transactions in Forex involve only 7 major currencies. Among them, on the sixth place we find as a reserve currency the Canadian dollar.
The Canadian dollar (CAD) is a rather original currency. Canada is not a leading country in terms of population and in terms of economy it ranks only 10th place in the world market. However, this North American state holds 9th place in terms of exports. This accordingly affects the behavior of the national currency on the foreign exchange market.
Until 1962, the Canadian currency had no reference to the USD, in spite of the signing of the Bretton Woods agreement. The Canadian government abandoned the process of relating its currency to the USD in 1970, due to high inflation of latter.
Just as for each major currency there is a central bank of that particular country, behind the Canadian dollar you will find the Bank of Canada. The Bank is doing everything possible to make the GDP growth and employment growth guaranteed by nature. At the same time the regulator keeps inflation under control.
Although foreign trade sphere has a crucial importance for Canada, the Bank of Canada refused the intervention policy in the foreign exchange market, considering such measures ineffective (the last intervention took place in 1998).
The Canadian economy
The Canadian economy is found on 10th in the world based on its performance. Over the past 20 years, economic growth was only twice interrupted by short-lived periods of recession: in the early 90s and in 2009.
Inflation in Canada has been relatively high for a long period. However, the budget deficit has been reduced thanks to the reforms of fiscal policy and improvement of the payment balance. This also reduced the rate of price growth and inflation.
If we analyze the economy of the state, it is necessary to recognize its orientation to exports. Canada produces gasoline and is a producer of minerals. Approximately 60% of Canadian exports are about agricultural products and forest industry. These factors can affect the CAD quotations. The structure of exports can be found more in depth on the official government Internet portals.
While in Canada the average age of the population is high in comparison with international standards, it is inferior to other developed countries considering this indicator. However, Canada has a fairly liberal immigration policy, and demography is not particularly important in terms of long-term economic outlook.
Traders will also be useful to bear in mind that Canada and the United States established close economic ties between them. This is why market participants are forced to closely monitor what is happening in the US market. Although the economic policies of Canada and the United States differ from each other, the situation in the United States has an impact on Canadian realities, including inflation.
In these two countries approaches to various problems are different. For example, Canada was able to avoid a lot of problems with overdue payments on mortgage loans, while banks in the US are faced with them.
At the same time, since the value of technology companies in the Canadian economy is lower, and it led to the weakening of the Canadian currency when there was a technological boom in 90s in the US. And in contrast, during the 2000s, the commodity boom (especially in the oil market) made the Canadian dollar stronger.
The main CAD drivers
The publications, which require the attention of the trader, include statistics as: industrial production, GDP, trade balance, retail sales, and inflation. These macroeconomic indicators are published regularly and most brokers, as well as financial and economic resources, provide public access to such information.
Market participants should also watch the statistics of employment, to follow the fluctuations of interest rates, the outcome of central bank meetings, to monitor the news throughout the day and reports of catastrophes of natural character, and also news about the decisions of the government and elections. All this information can influence exchange rates in the most direct way.
Since Canada is engaged in the export of resources, the Canadian dollar fluctuations depend on how the commodity prices behave. Particularly, in the case of Canada, fluctuations of oil prices are very important; when oil quotations are growing, it is profitable to open long positions on CAD, and short positions on currencies of the countries that import Canadian crude oil (for example Japan).
In addition, a certain impact on the Canadian dollar can have countries that are major importers of Canadian material (for example China).
Fluctuations in exchange rate are linked in addition to the capital inflow. When commodity prices are high, it increases the consideration of investing in the Canadian economy and in state assets, so the capital inflows affect the CAD.
Unique factors
Taking into account the relatively good state of the Canadian economy, it should be noted that the country has a fairly high level of interest rates compared with other developed countries.
Canada also enjoys a good reputation in the field of financial management. It is believed that the Canadians have found the perfect compromise between market and state economic approaches. This is especially noticeable when there is a period of uncertainty in the global economy: the Canadian dollar can be easily attributed to the safest currencies, although it is not a reserve currency such as the USD. The Canadian dollar is not a reserve currency, but its role is gradually changing. In the current moment this currency stays in sixth position in line with the world's reserve currencies, with constant growth attributable to its share.
Please note that the Canadian dollar is firmly linked to how prosperous the US economy is. The United States is the main trading partner of Canada. Due to this, their policies have a very strong influence on the quotes.
Conclusion
Although Canada is not among the largest suppliers of goods in the world market and it is not considered among large states, it has a stable economy: the Canadians managed to find a balance between the inflow of profits from natural resources and excessive dependence of this sector.
Taking into account that the Canadian dollar is gradually acquiring the status of a US dollar alternative, there is no reason to be surprised that its presence in the Forex market is constantly growing.