Canadian Dollar (CAD) volatility is potentially explosive. This volatility is aggravated by key drivers like recession reads, oil prices, and the overall configuration of global trade. As approximately 75% of Canada’s exports, including oil and autos, are destined for the United States, the health of the U.S. economy plays a significant role in influencing the CAD’s value. The Bank of Canada’s monetary policies and the price of oil—a major Canadian export—further impact the currency’s performance. In this uncertain economic landscape, identifying these factors is key to predicting CAD movements.
Oil Prices and Trade Dynamics
Additionally, oil prices have an outsized effect on the value of the Canadian Dollar since petroleum is Canada’s biggest export. For example, changes in oil price instantly affect the CAD. Increased oil prices historically have bolstered the currency. Higher oil revenues mean Canada’s trade balance is in surplus. This balance indicates whether the value of exports exceeds the value of imports. Secondly, a positive trade balance is supportive of the CAD, as it directly reflects a strong export sector.
The second important factor is the trade relationship between Canada and the United States. That’s partly because a huge share of Canadian exports go to the U.S. Thus, any changes to the U.S. economy can have a powerful effect on the value of the CAD. A healthy U.S. economy increases demand for Canadian exports, which supports the CAD. On the other hand, a slowing U.S. economy will lower demand, a fact that can hurt the currency.
Bank of Canada’s Influential Role
The BoC certainly has an outsized ability to direct the Canadian Dollar’s trajectory. It does this by quickly, clearly and effectively communicating its most consequential monetary policy actions. This means that by setting interest rates, the BoC can effectively steer how much banks lend to one another, which in turn can help steer overall economic activity. The central bank’s main objective is to keep inflation under control with a target level of 1-3%. To achieve this, the BoC may adjust interest rates—raising them to curb inflation or lowering them to stimulate economic growth.
Further, the BoC could use quantitative easing or tightening to affect credit conditions. Quantitative easing, or asset purchases by a country’s central bank, can be CAD-negative as it usually entails buying financial assets to introduce liquidity into the economy. The combination of qualitative and quantitative tightening is suffocating liquidity in the market. This is typically bullish for the Canadian dollar as it signals a monetary policy hawkish shift.
Economic Indicators and Market Sentiment
There are many important economic indicators that help decide how strong or weak the Canadian Dollar will be. An economist’s wish list of these would be Gross Domestic Product (GDP), Manufacturing and Services Purchasing Managers’ Indexes (PMIs), employment figures, and consumer sentiment surveys. Positive economic data is CAD supportive because it’s indicative of a strong, healthy economy that’s maybe accelerating.
Negative economic data can contribute to a drop in CAD. For example, GDP growth that comes in below expectations or reports of slowing manufacturing activity can be evidence of a weakening economy, which worries investors and traders alike. Unemployment statistics have long been the harbinger of a nation’s economic wellbeing. Second, when employment rises, spending, confidence and demand usually follow, which impacts CAD positively.
Consumer sentiment surveys provide further context around Americans’ confidence in overall economic conditions. Overall, positive sentiment can translate into increased spending and investment, further driving economic growth and supporting the CAD. Conversely, negative sentiment can lead to more restrained consumer spending and business investment, which can put downward pressure on the currency.