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 international commerce to Canada’s economy (and the impact that currency has on trade), the Bank of Canada does not intervene in the currency. The last intervention was in 1998, when the government decided that intervention was unsuccessful and pointless.
The Canadian Dollar’s Economic Backbone
Canada, which was ranked tenth in terms of GDP (measured in US dollars) in 2017, has experienced reasonably steady growth during the last two decades, with only two brief recessions in the early 1990s and 2009.
Canada has had high inflation rates for a long time, but tighter fiscal policy and a better current account balance have resulted in fewer budget deficits, lower inflation, and lower inflation rates.
It’s also vital to consider Canada’s commodity exposure when assessing the country’s economic status. Canada is a significant producer of petroleum, minerals, wood products, and grains, and the trade flows from these commodities can have an impact on investor perceptions of the loonie.
This information is widely available on the internet, as it is in practically every industrialized economy, through sources such as the Agriculture and Agri-Food Canada website.
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), traders of the Canadian dollar keep a close eye on events in the United States. While Canada and the United States have pursued very different economic policies, the reality is that conditions in the United States inevitably spill over into Canada to some degree.
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.
Drivers Of The Canadian Dollar
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).
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).
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.
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.
