The Canadian dollar is among the most popular trading instruments, even though its market share is not particularly huge. The nickname of this Forex money is linked to a bird. In the course of its history, Canadian dollar has undergone a bunch of transformations. For example, did you know that the Spanish currency was initially in circulation in Canada?
Today, major financial institutions prefer to keep money in it, and its stability depends chiefly on two factors. Would you like to learn what these are? If so, keep on reading our article in order to trade the Canadian dollar like a pro.
1. Canadian Dollar: Introduction
2. Canadian Dollar: Brief History
3. Loonie Exchange Rate and What It Depends on
In the global currency system, the Canada Dollar is abbreviated as CAD. Its nickname - «The Loonie» - stems from the name of the bird, the country’s national symbol which appears on its coins.
Canadian Bank Note Company and BA International Inc. are the two organizations that issue notes in denominations of $10, $20, $50, and $100, while the Royal Canadian Mint is in charge of minting the coins.
Canada is a member of the International Monetary Fund, which is why the Canadian dollar is listed on the CLS. Among the players of the global financial market, Canada is one of the most commonly held reserve currency. Due to its limited liquidity, it is more stable than the Euro or the U.S. dollar. The Canadian dollar is preferred by both large investors and central banks which partially hold foreign exchange reserves in this Forex money.
Until the mid-19th century, reals, the currency of the Spanish colonies, were in circulation in Canada. In 1841, the Canadian pound was introduced, becoming the country's national currency. Its exchange rate coincided with the value of the U.S. dollar. The Canadian dollar entered the picture in 1857. However, a portion of the settlements were still issuing their own currencies.
In 1871, the Canadian legislative authority decided to unify currency throughout the territory. That said, both the U.S. dollar and the British pound were legally used along with the loonie as a means of payment until 1952.
As previously mentioned, the exchange rate of Canadian dollar was fixed to the U.S. dollar. Later on, it was replaced by a floating rate, and it remained that way from 1951 to 1962. Then Canada was again fixed to the USD in 1962 and switched back to the floating rate in 1970.
The highest ever U.S. dollar to Canadian dollar exchange rate has been 1.0443. Its decline to the minimum historical values against the U.S. currency continued from 1974 to 2002. The drop stopped at 0.6179 U.S. dollars against the loonie. The USD/CAD quotes were around 1.30 at the end of 2019.
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The Canadian dollar is freely convertible. This means that its Forex rate is formed based on supply-and-demand situation. When considering the Canadian dollar as Forex money, a trader needs to be able to evaluate the current power dynamics in the market and the interest on the part of buyers and sellers of the loonie.
The Canadian dollar rate is affected by a variety of fundamental factors, the key ones being:
Monetary policy of the Central Bank. Just like any other currency, the loonie goes up when the Central Bank tightens monetary policy by raising interest rates. By the same token, its exchange rate drops if the regulator softens the monetary policy and reduces the base interest rate.
The Bank of Canada currently chaired by Stephen Poloz stuck to a moderately tight monetary policy by the end of 2019. It didn’t reduce the rate like other global regulators did, keeping it at the level of 1.75%. Against this backdrop, the Canadian currency was trading relatively stable against the U.S. dollar.
That being said, in the light of global economic and monetary trends and external risks, the Bank of Canada may go for a reduction in the base interest rate this year which will partially weaken the exchange rate.
Canadian Dollar belongs to commodity currencies. Its price is largely affected by crude oil prices, while GDP and budget revenues depend on the production and export of raw materials. If there is a drop in oil prices, the Canadian dollar may lose traction, and vice versa. The strength of the correlation between the oil exchange rate and the Canadian dollar depends on the degree of hype around crude oil prices. Back in 2015-2016, the loonie was extremely sensitive to decline in crude oil quotes.
In 2019, the black gold price volatility did not invoke a strong reaction from the currency which was far more sensitive to the central bank members’ rhetoric stating that there was a threat to the country's economy due to the weak oil prices.
Trade wars, conflicts in the Middle East and other geopolitical turmoil have a huge impact on crude oil prices at the moment. These exact factors also affect the exchange rate of the U.S. dollar. Given the existing situation, traders need to make sure to carefully consider everything when trading Canadian currency, in particular USD/CAD.
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