Forex trading is becoming a increasingly popular option for speculators. Trading platforms boast 24-hour market access, enhanced security, and tremendous potential gains. Additionally, anyone can set up a simulated trading account to practice trading techniques.
However, with such easy access, come risks. FX trading is a vast market, and every trader is competing with thousands of professionals in the financial sector. As such, you would be wise to conduct due diligence prior to entering this market. The same is true when purchasing Canadian stocks.
In particular, you should understand the economic underpinnings of certain currencies. As an investor or Canadian forex broker, especially a new one looking to learn how to invest in stocks, this article will help you understand the Canadian Dollar and unique factors that influence its value.
The Canadian Dollar
CAD is considered to be one of the most stable currencies globally. Long term speculators trade the Canadian Dollar in substantial volumes daily.
About 7 currencies account for 80% of the forex market’s volume, and the CAD is among these major currencies.
This currency is often referred to as the “Loonie” because of the appearance of a loon on the back of the C$1 coin. According to the International Monetary Fund, the CAD is the 5th most commonly held currency, with its cumulative market share value near US$119 billion.
The Canadian Dollar is defined as a “floating currency” because it derives its value from the open market. The Canadian government does not dictate how much the CAD is worth at any given time, or “peg” its value to another currency. Investors and brokers should understand this fact because it means they control the currency’s value.
In the past, several geopolitical issues and international conflicts have significantly affected the currency.
Some of these events include the Global Financial Crisis in 2008, as well as the United States Civil war. For instance, in 2008, the CAD traded at or beneath parity until August. From August to the end of 2008, the USD/CAD experienced significant swings in a broad range between 1.2000 and 1.3000 on the FX market.
The Central Bank Of Canada
Traders should understand that the Central Bank of Canada significantly influences the currency’s value.
First, the relationship between the CBC and the CAD is similar to the United States’ Federal Reserve’s relationship with the United States Dollar. For instance, the CBC is the chief financial authority when it comes to the CAD.
This means that it can lower or raise interest rates related to the CAD, and it can also intervene in the FX market on behalf of the CAD.
In case of unexpected volatility, the central Bank of Canada is actively involved in measures to limit huge swings in value.
This is known as an “intervention policy” where the bank deals with excessive volatility facing the CAD. For instance, the CBC can purchase CAD in the FX markets using foreign currencies. This strategy is meant to create demand for the CAD in the FX markets, thus increasing its value against other currencies.
Intraday Volatility: Economic Data Releases
The controlled release of statistical economic data reports regarding the CAD’s volatility also influences its value. Specifically, when government sources release statistical financial data, this may lead to substantial increases in intraday volatility.
There are numerous domestic economic data reports monthly. Data about the labor force, retail sales, industry, and consumer price index is released every month. Additionally, the CBC releases short-term market-moving information during their Bank of Canada announcements, which occurs every two months. These announcements mainly entail interest rates on the inflation of the CAD.
These releases create a significant spike in intraday volume, which affects the FX market significantly. And since Canadian forex brokers trade based on such information, the impact on the value of the CAD in FX markets is visible.
Intermediate-Term Volatility: Relationship To Commodity Prices
Commodity pricing is another major factor that affects the value of the CAD. Canada’s economy mainly depends on trade with international partners. The development and export of commodities such as natural gas, crude oil, and lumber is vital to the country’s economy. In total, exports represent 45% of the country’s GDP.
Additionally, this means that the price of oil in the global markets may affect the value of the CAD. For instance, when crude oil prices declined from about $105 per barrel to $45 in 2015, the country’s economy was greatly affected. Moreover, the CAD saw a sustained decline in purchasing power in relation to the US dollar.
In summary, investors and Canadian forex investors should understand that the Canadian Dollar is a “floating currency.” Its value is determined by the open market, meaning that its volatility is high.
To some traders, this can be a nuisance, while to others, this can be an opportunity. After understanding the factors that cause this volatility, you should use this knowledge to manage your trades effectively.