I personally don’t tend to pay too much attention to correlations between various instruments, however it’s hard to argue against the significance of the relationship between oil and the Canadian Dollar, or CAD.
It’s frequently touted by various nations that oil is power, after all, it’s worth a fair bit to everyone around the globe.
The early oil barons transformed the way business is done, from way back to Rockefeller’s Standard Oil company, to the modern-day tycoons, the world’s balance of power shifts greatly because of oil.
So, what makes it so special?
With all the hype surrounding things like electric vehicles, etc., many people think that the importance of oil will reduce. They’re sadly mistaken.
Not many are aware that other oil-dependent industries are booming, and will continue well into the future. Industries such as Maritime transportation and aviation are such examples.
There are hundreds of products that are manufactured thanks to a barrel of oil, and as technological advances make oil faster and cheaper to extract, new discoveries and inventions will only make the importance of oil-derived products more significant.
This is especially the case in Canada, particularly the Canadian GDP. Similarly to Australia, the Canadian economy is an energy driven economy. Due to this, the Canadian central bank keeps a sharp eye and adjusts their monetary policy accordingly.
Regardless of your technical or fundamental analysis, you should clearly notice that when one falls, the other follows. When one rises, the other trends to follow.
This, folks, presents some trading opportunities to us humble retail traders.
Enter, US Oil Inventories. Based on the above, the fundamental reasons that move oil, also move the CAD. And, for those of us trading the Forex market, that makes the USDCAD pair pretty darn important. Adding to this importance, is that more than 75% of Canadian Oil go to the US.
Because of this, US Oil Inventories give us a pretty decent indication of the future demand for Canadian oil, this moving the Canadian dollar, and subsequently, the USDCAD. When US inventories are on the rise, the Canadian dollar will fall because the price of oil is falling. Conversely, when inventories fall, oil rises due to a lack of supply or anticipation of more demand. This causes the USDCAD to fall.
Much like any other commodity, Oil’s price is influenced by imbalances between supply and demand. So how is this supply and demand controlled? By uniting all the most influential/largest oil produces under what’s known as OPEC (Organisation of Petroleum Exporting Countries).
These regular OPEC catch-ups almost always result in significant volatility in the oil market, which then spills over into the Forex market, due to the CAD’s correlation with oil.
It goes without saying, that trading is a game of probability, and being aware of this correlation can add to value to your Forex trading system.
Source: Vantage FX Blog