Oh Canada… Uncle Sam’s friendly, environment-loving, French-influenced, semi-frozen buddy up north. It is a place known to have created some of the most amazing things in the world, such as basketball, baseball, maple syrup, and Smarties.
Canada, whose geographical area takes up most of North America, extends from the Atlantic Ocean all the way to the east to the Pacific Ocean. It is composed of ten provinces and three territories, and is considered as one of the world’s most developed countries.
In terms of land mass, Canada is numero dos in the world right after Russia! Given its sheer size and contributions to the world, you can just imagine how Canada and its domestic currency, the Canadian dollar, are important to forex trading.
Canada: Facts, Figures, and Features
- Neighbors: United States of America
- Size: 3,854,085 square miles
- Population: 35,427,524
- Density: 8.3 people per square mile
- Capital City: Ottawa
- Head of State: Queen Elizabeth II, represented by Governor-General David Lloyd Johnston
- Prime Minister: Stephen Harper
- Currency: Canadian dollar (CAD)
- Main Imports: machinery and equipment, motor vehicles and parts, electronics, crude oil, chemicals, electricity, durable consumer goods
- Main Exports: Justin Bieber, motor vehicles and parts, industrial machinery, aircraft, telecommunications equipment, electronics, chemicals, plastics, fertilizers, wood pulp, timber, crude petroleum, natural gas, electricity, aluminium, Steve Nash, Sidney Crosby
- Imports Partners: U.S. 50.6%, China 11%, Mexico 5.5%
- Exports Partners: U.S. 74.5%, China 4.3%, UK 4.1%
- Time Zones: GMT -8, GMT -7, GMT -6, GMT -5, GMT -4
- Website: http://www.canada.gc.ca/home.html
Canada is considered as a resource-based country, which basically means that most of the economic growth it experienced early on came from the utilization and export of its own natural resources.
According to the IMF, Canada’s economy is the tenth largest in the world, making it part of the world’s G8. It ranks as the seventh biggest producer of gold and the seventh largest producer of black crack (oil).
Despite its robust industrial and manufacturing industry, much of Canada’s GDP actually comes from its service sector. Its advanced services sector employs three out of every four working Canadians and account for about 70% of the country’s GDP. Next time you meet a Canadian, go ahead and make a bet with him that he works in the services industry. More often than not, you’ll win!
Canada’s economy really got going in January of 1989, when the Free Trade Agreement came into effect. The agreement basically removed all the tariffs (that is the tax imposed on trade) between the US and Canada. In effect, Canada now exports over 70% of its goods to the US.
Monetary & Fiscal Policy
The Bank of Canada (BOC) is the main governing body when it comes to determining the country’s monetary policy. Decisions on the monetary policy are made by Governing Council, which is made up of the bank’s governor, the senior deputy and four other deputy governors.
Unlike most other central banks, the BOC doesn’t have a set time to make changes on its policies. The council meets every single working day and can alter monetary policy to their liking at any time.
The bank’s basic mandate is similar to other central banks in that they aim to make sure that the Canadian dollar’s value is stable and that the country’s inflation rate is within their 1-3% target. The BOC does this through open market operations and constant adjustment of the bank rate.
The BOC implements its open market operations by using a method called the Large Value Transfer System (LVTS). The LVTS enables commercial banks all over Canada to borrow and lend money to each other so that they could go about their daily operations. Now, the interest rate charged on these transactions is called the bank rate. By altering the bank rate, the BOC can basically control the flow of money in the economy.
To illustrate this, let’s say the bank rate is set at 2.00%. In one of its meetings, the BOC realizes that the CAD is losing value much faster than expected, which is causing businesses to increase the prices of goods they sell and the services they offer. The BOC then decides to raise the bank rate to 2.50%.
By hiking the bank rate, the interest needed to be paid to lenders increases, in turn, reduces the likelihood of banks, businesses and consumers of taking additional debt. Now, since there is less money in the pockets of consumers, the chance of them spending is decreased, preventing any further inflation. What business in their right mind would increase prices when nobody is buying, right?
Getting to Know the CAD
You might be wondering why the CAD is nicknamed after Canada’s national bird, the Loonie… Well, that’s because that’s the engraved design on Canada’s coins! Check out these other cool properties of the Loonie:
The Black Crack and Me
Historically, the price of black crack has been highly correlated with the USD/CAD. The general rule is that whenever oil prices start climbing, the CAD usually follows. If the price of oil is projected to increase over the next couple of years, then you’d want to go sell the USD/CAD!
My work hours are short…
The USD/CAD has been known to move in tight ranges for the most part of the day. It is only when U.S. traders are eating their Cheerios during the overlap of the European trading session and the US trading session that the pair begins to move.
…unlike my B.F.F., the USD…
A key factor to look at when trading the USD/CAD is that its direction is closely tied to the U.S. economy. Remember, more than being close neighbors, the U.S. and Canada engage in heavy trade with each other. When the U.S. economy experiences robust growth, the Canadian economy is usually just right behind it! So whenever you decide to trade the CAD, take some time off to see how well (or poorly) the U.S. is doing.
…but I’m still feisty during the US session.
The CAD usually doesn’t start moving until the U.S. trading session, around 1:00 pm GMT. The CAD offers little movement during the Asian trading session and the morning European trading session.
Important Economic Indicators for the CAD
Consumer Price Index (CPI) – Similar to other central banks, the Bank of Canada’s objective is to make sure that inflation does not get out of hand. Since the consumer price index tracks the increase (or decrease) in the prices of consumer goods and services, the report is closely watched by currency traders.
Gross Domestic Product (GDP) – The GDP is the broadest measure of Canada’s economic activity. It reveals whether the country is growing or not.
Trade Balance – Just like other commodity-based countries, Canada’s economy is highly susceptible to changes in its export and import activities.
Ivey Purchasing Mangers’ Index (PMI) – The PMI is a survey designed to see whether businesses are optimistic or pessimistic about the economy. A reading above base line 50.0 means that conditions in the business sector is growing while a reading below 50.0 indicates otherwise.
What Moves the CAD?
U.S. Economic Data
U.S. economic data usually prints roughly at the same time as Canadian data. On the one hand, the negative data from the US coupled with positive data from Canada could lead to a massive drop in the USD/CAD’s value. On the other hand, positive U.S. data and poor Canadian data could send the USD/CAD soaring high!
Mergers and Acquisitions
Because of the proximity between the U.S. and Canada, company mergers and acquisitions happen quite often. These cause a huge amount of money to flow between the two countries, which create a significant effect on the foreign exchange market.
For example, in order for a U.S. company to buy out a Canadian company, it must first exchange it’s U.S. dollars to Canadian dollars to complete the transaction. Imagine the amount of money that flows through the foreign exchange market just to seal the deal!
Trading the USD/CAD
USD/CAD is traded in amounts denominated in USD. Standard lot sizes are 100,000 USD and mini lot sizes are 10,000 USD.
The pip value, which is denominated in Canadian dollars, is calculated by dividing 1 pip of USD/CAD (that’s 0.0001) by USD/CAD’s current rate.
Profit and loss are denominated in Canadian dollars. For one standard lot position size, each pip movement is worth 10 CAD. For one mini lot position size, each pip movement is worth 1 CAD. For example, if the current exchange rate of USD/CAD is 1.1000 and you want to trade one standard lot, then one pip would equate to 9.90 USD.
Margin calculations are based in US dollars. With a leverage of 100:1, 1,000 USD is needed to trade 100,000 USD/CAD.
USD/CAD Trading Tactics
Since USD/CAD is only active during the U.S. trading session, the pair is highly susceptible to fake outs during the other two trading sessions. This means that a break in a significant support level in the USD/CAD during the morning European trading session would, more often than not, simply be a fake out.
Watching the differences in the results of economic data between the U.S. and Canada is also a great practice to determine where the USD/CAD is headed. Because both and US and Canadian data are released just a few hours or minutes apart, variances in results tend to result in exaggerated one directional moves.
For instance, negative US data coupled with positive Canadian data would be a good reason to sell USD/CAD.
Lastly, beyond looking at economic data, spending some time to analyze oil price behavior would help a lot in trading the CAD.
Since Canada is considered as one of the world’s major black crack producers, changes in its price create quite a hefty impact in the CAD’s value. In fact, since 1988, the exchange rate of USD/CAD and the price of oil have been inversely correlated by as much as 68%.
How can you use this to your advantage? Well, if you notice that over time that oil prices at your local gasoline station are rising, it could give you the additional confirmation you need to short the USD/CAD.