The Canadian Dollar (CAD) is one of the trickiest currencies to be traded as it is depending not only on Bank of Canada’s (BOC) monetary policy but also on the overall oil market. Canadian Gross Domestic Product (GDP) is heavily influenced by the oil industry as Canada is one of the biggest oil producers in the world.
Therefore, we’re talking about a central bank, like in the case of any other currency, and a market that is very unpredictable, to say the least. This makes trading the Canadian Dollar a real adventure and the USDCAD major is the main representative currency pair.
Bank of Canada is meeting on a regular basis, every six weeks, in order to assess the state of the Canadian economy and set the pace of the interest rate and the overall monetary policy for the period ahead. The interest rate decision is always being announced on a Wednesday, shortly after the North American trading session starts and it is being followed by a press conference.
When compared with the Fed’s and ECB’s press conferences, the one Bank of Canada press conference is not creating that much volatility in the markets. Almost always the market is making its move on the interest rate announcement and then rarely looks back, no matter what the press conference is showing.
Besides BOC monetary policy meetings, oil is one component that moves the CAD pairs. As a rule of thumb, any positive news for the oil market is bullish for the Canadian Dollar, while any negative news is bearish.
This makes news related to OPEC (Organization of Petroleum Exporting Countries) meetings very important for the CAD pairs, as well as oil inventories and other geopolitical strategies that are meant to influence oil prices.
As an example, at the start of 2016 when oil prices collapsed all the way to below the $30 level, the USDCAD jumped over 1.46 in an almost vertical move that mirrored the drop in oil prices. By the time oil stabilized and started to recover, the USDCAD reversed and dropped well below the 1.30 mark.
The major Canadian Dollar denominated currency pair is the USDCAD and it is the most liquid of all the CAD pairs. However, when compared with other currency pairs, the USDCAD actually has poor liquidity and this is visible especially when a daily rollover is taking place. At that moment of time, the spreads on the USDCAD are increasing significantly due to the fact that liquidity providers are having trouble matching clients’ orders.
Besides the Bank of Canada meetings and oil-related news, there are only three other economic events to consider when looking at the Canadian economy; inflation (Consumer Price Index), jobs data and Ivey PMI.
Consumer Price Index (CPI) is the one the BOC’s mandates; to keep inflation below or close to two percent. Therefore, when inflation is ticking up, traders will look for BOC to come and hike the rates, when inflation is keeping to the downside, the natural tendency will be to sell the Canadian Dollar as expectations for the central bank to come and cut the rates or ease the monetary policy are growing.
Jobs data is released normally together with the Non-Farm Payrolls (NFP) in the United States, namely on the first Friday of each and every trading month. Because of this, trading the USDCAD pair on that day is extremely difficult as the pair will be influenced by both releases at the same time and trading algorithms have the tendency to move the pair aggressively.
Sometimes Canadian jobs data is released one week earlier or later, but this is very rare.
The Ivey PMI represents the classical Purchasing Managers Index (PMI) surveys that are calculated all over the world with one thing that is specific only to Canada; it is not divided into different releases based on different sectors. This means that it is only one release that refers to the overall economy and the outcome is compared with the fifty level. Any print above the fifty level shows an economy that is expanding, while a PMI below fifty means that the economy is contracting.
To sum up, the Canadian Dollar is a currency that travels a lot due to both being less liquid as well as being influenced by factors outside the foreign exchange market. However, these swings have the potential to put a lot of profits into trader’s accounts if they are properly understood and interpreted.