HomeHigher Oil Prices Keep the Canadian Dollar Bid

Higher Oil Prices Keep the Canadian Dollar Bid

Last Friday was the first Friday of the new trading month. As usual, the jobs data out of the United States and Canada was the highlight of the trading day for the currency trading community. 

Trading the U.S. dollar and the Canadian dollar through the releases is a tricky thing. One problem comes from the fact that both releases come out at the same time. In other words, if the U.S. jobs data disappoints, but so does the Canadian jobs data, what would be the reaction on the USDCAD pair? This is something that puzzles many traders, and for this reason, they often wait for data to be public and only after that trade the pair.

Yet there is another factor that weighs on the pair – perhaps the most important one. That is – the price of oil.

Oil and How It Moves the CAD Pairs

Let’s start with last Friday’s data. The United States economy added 49k jobs during the month of January. However, Canada lost 212.8k jobs. The discrepancy between the two cannot have been more staggering.

Because of that, the normal reaction would be that the Canadian dollar will weaken against the U.S. dollar. After all, America added jobs, while Canada lost plenty. Yet, the USDCAD pair ended the day at its lows. Even more, on Monday’s opening and the rest of the new trading week so far, the pair kept moving lower.

The answer? The price of oil is in a strong, bullish trend. It recently climbed to $60 (e.g., Brent) and close to it (e.g., WTO crude oil price).

Since Canada is an energy-intensive economy, meaning that a big chunk of its economic output is directly linked to oil and oil-derived products, the price of oil impacts the GDP. Thus, it impacts the currency that fluctuates in a direct correlation with the price of oil.

In other words, for the Canadian dollar, it matters most what the price of oil does, then the changes in the labor market, the Ivey PMI, or other economic indicators. Because there is a lag between the time the price of oil moves and the moment its effects are seen in the economic growth, the expectations are that the labor market and the overall economy will recover, should the prices of oil stabilize at higher levels.

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