The Canadian Dollar: Overview

Speculators are increasingly turning to foreign exchange, or forex, trading. Advertisements tout “commission-free” trading, 24-hour market access, and big potential profits, and it’s simple to set up virtual trading accounts to practice trading strategies.

There is a risk associated with such simple access. Although forex trading is a large industry, each forex trader is up against thousands of experienced analysts and other knowledgeable experts, many of whom work for major banks and institutions. The foreign currency market is open 24 hours a day, seven days a week, and there is no central exchange; trading is conducted between individual banks, brokers, fund managers, and other market participants. With the emergence of predictive analytics models and machine-learning capabilities, artificial intelligence has also revolutionized the forex market in recent years, allowing forex traders to gain a significant advantage.

Forex is not a market for the unprepared, and investors should conduct extensive research before trading. Specifically, aspiring traders must comprehend the economic foundations of the market’s major currencies, as well as the specific or unique variables that influence their value.

The Canadian Dollar

The Canadian dollar (commonly referred to as the “loonie” due to the appearance of a loon on the back of the C$1 coin) is one of these main currencies, accounting for over 80% of the FX market’s turnover, and is the sixth-most held currency as a reserve.

The Canadian dollar’s currency ranking is unusual in that Canada’s economy (in terms of GDP in US dollars) is ranked tenth in the world. Canada is likewise low on the list of big economies in terms of population, but it is the world’s 12th largest export economy, according to the MIT-hosted Observatory of Economic Complexity. Following the Bretton Woods system, Canada allowed its currency to float freely from 1950 to 1962, when a government was ousted by widespread devaluation, and then established a fixed rate until 1970, when excessive inflation forced the government to return to a floating system.

Central banks back all of the world’s main currencies in the currency market. The Bank of Canada is in charge of the Canadian dollar. The Bank of Canada, like all central banks, strives to strike a balance between policies that support employment and economic growth while keeping inflation under control. Despite the importance of foreign commerce to Canada’s economy (and the impact that currency has on trade), the Bank of Canada does not intervene in the currency market — the last intervention was in 1998 when the government decided that intervention was unproductive and pointless.

The Canadian Dollar’s History

The Canadian dollar’s history began shortly after the Confederation of Canada in 1867. Early times of trading among Inuit and First Nations populations gave way to adoption of the British Pound and currencies connected to the US dollar as settlement patterns changed prior to the currency’s introduction.

The Canadian dollar was originally partially backed by gold, but after Britain’s decision to abandon the gold standard during the Great Depression in 1931, Canada moved away from it entirely. Since then, the value of the Canadian dollar has fluctuated between fixed and variable exchange rates.

The Bank of Canada was founded in 1935 and initially issued ten Canadian banknotes, which were gradually decreased in number. Soon after, the country’s chartered banks were given less authority to print their own notes, and the Bank of Canada became the exclusive issuer of paper currency in the mid-twentieth century.

The Canadian Dollar’s Economic Backbone

Canada’s economy is the ninth-largest in the world by nominal GDP, with a GDP of $1.5 trillion CAD in 2020.

The history of Canada’s economy traces a progression from indigenous hunting and farming civilization to urbanization and industrialization following the entrance of European settlers in the 16th century, with the trafficking of products such as fur and beaver pelts. Although like many industrialized countries, Canada’s economy is now dominated by services, the country’s primary sector is vital due to natural resources such as oil, natural gas, lumber, and numerous minerals.

It also has a thriving commercial fishing and seafood business, as well as a leading position in entertainment software. The value of Canada’s export trade is estimated to be around $390 billion, with the United States accounting for $338.2 billion of that total. China comes in second with $18.8 billion in imports from Canada. In terms of imports, Canada is reliant on the United States for 51.3 percent of its imports, totaling $222 billion in 2020.

Although Canada’s population average age is high by global standards, it is younger than most other developed economies. However, Canada has an open immigration policy, and its demographics aren’t particularly concerning for the country’s long-term economic prospects.

Because Canada and the United States have such a close trading relationship (they are at or near the top of each other’s import/export markets), dealers of the Canadian dollar keep a close eye on events in the United States. Despite the fact that Canada has followed very different economic policies than the United States, the reality is that conditions in the United States always flow over into Canada. (Other economic phenomena, such as inflation, are influenced by these conditions.)

The U.S.-Canada relationship is particularly noteworthy because of how situations might diverge. The financial market framework in Canada helped the country avoid many of the poor mortgage problems that plagued the United States. Technology businesses, on the other hand, are less important to Canada’s economy, which led to the relative weakness in the Canadian dollar during the US tech boom in the 1990s. In addition, the loonie outperformed the US dollar during the commodity boom of the 2000s (especially in oil).

The Canadian Dollar’s Motives

Because economic models are often based on a small number of economic factors, they are notoriously wrong when compared to real market rates (sometimes just a single variable such as interest rates). Traders, on the other hand, consider a considerably wider variety of economic data when making trading choices, and their speculative outlooks can change rates in the same way that investor optimism or pessimism can move a stock above or below its basic value.

GDP, retail sales, industrial production, inflation, and trade balances are all major economic indicators. This data is released on a regular basis, and many brokers, as well as financial information sources such as the Wall Street Journal and Bloomberg, make it freely available. Natural disasters, elections, and new government policies can all have a substantial impact on currency rates. Investors also pay attention to employment, interest rates (including scheduled central bank meetings), and the daily news flow.

The performance of the Canadian dollar is typically linked to the movement of commodity prices, as is the case with countries that rely on commodities for a significant amount of their exports. When oil prices rise, investors tend to go long on loonies while going short on oil importers (such as Japan). Similarly, fiscal and trade policies in nations like China, which are big importers of Canadian resources, have an impact on the loonie.

Capital inflows can also influence the value of the Canadian dollar. Increased interest in investing in Canadian assets is common during periods of higher commodity prices, and this influx of wealth can have an impact on currency rates. The carry trade, on the other hand, isn’t as important for the Canadian dollar.

Factors That Make The Canadian Dollar Unique

Canada has a relatively high-interest rate among industrialized economies, given its relative economic strength. Canada has also earned a reputation for fiscal balance and for finding a suitable middle ground between a state-dominated economy and a more laissez-faire approach. This is important during times of global economic turmoil because, while the Canadian dollar is not a reserve currency like the US dollar, it is seen as a global safe haven.

The Canadian dollar is not yet a reserve currency on par with the US dollar, but that is changing. Canada is now the world’s sixth most widely held reserve currency, and its popularity is growing.

The strength of the Canadian currency is also inextricably linked to that of the United States. Though it would be a mistake for traders to presume a one-to-one relationship, the United States is Canada’s largest trading partner, and US policies can have a considerable impact on Canadian dollar trading.

Final Thoughts

Currency rates are notoriously difficult to forecast, and most models only operate for a few weeks or months at a time. While economic models are rarely effective for short-term traders, long-term patterns are shaped by economic conditions.

Canada’s economic vitals are steady, and the country has established a balance between benefitting from its natural resource wealth and avoiding “Dutch disease” as a result of over-reliance on these items. Traders should not be shocked to see the loonie become more relevant in the currency market as Canada becomes a more viable alternative to the US dollar.

We Offer Mentorship Program

If you think you are ready to go to the next level, then this is the right program for you. The Full Mentorship Program includes close supervision and mentorship to maximize your trading skills.

 PROFESSIONAL TOOLS 

Practical tools to help you track and improve your trading capabilities.

INSTRUCTOR

A professional trader who will serve as your mentor, personal accompaniment, and a direct communication channel all the way.

TRADING COMMUNITY

Entering a quality community of traders who already know how to make successful trades in the market.

Learn More