How Oil Price Dictates the USD/CAD Exchange Rate

The world runs on oil. The insatiable demand from developed and developing countries means that crude oil remains one of the core components of the global economy. It keeps things moving, and we simply cannot live without it.

Insatiable Demand

As the world’s biggest oil consumer, the United States relies on a handful of countries to keep its demand satisfied. Accounting for roughly 37% of the nation’s oil imports, America’s northern neighbor, Canada, is its biggest supplier. Every day, Canada sends over 3 million barrels of oil and petroleum products south of the border.

A Picture Perfect Correlation

This incredibly high volume of export creates an equally high demand for Canadian dollars, formerly known as loonies. As oil prices rise, so does the value of the loonie relative to the US dollar. If the price falls or the demands weaken, the USD will most likely gain value against the CAD. 

For example, between the years 2000 to 2016, oil prices had a negative correlation with the USD/CAD at 93%. Over this period, almost without fail, when oil prices increased, the USD/CAD decreased. When oil prices decreased, then USD/CAD increased.

Crude as the Core of the Canadian Economy

Last year, Canada ranked as the fourth-largest crude oil producer and exporter in the world. This massive volume of export means crude sales account for the largest contributions of foreign currency into the Canadian market. And since most importers value crude oil in USD, this means that the majority of the foreign currency coming into the country is USD. 

The Bottom Line

While it may not be as simple as going to the gas station, observing high oil prices, and then shorting the USD/CAD, a careful and attentive investor can certainly use oil prices as a tool for successfully navigating the forex market. Incorporated into an already effective trading plan, it is yet another tool for mastering the market. 

Photo by Charles “Duck” Unitas

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