Canada is the second largest country in the world by landmass, but one of the most sparsely populated. In fact, even though Canada is several times larger than the United States, it has only about one-tenth of the population.
Population isn’t everything, however. Canada’s economy proved to be one of the strongest during the financial crisis of 2008, helped by its ever-producing oil fields which keep the nation on a growth trajectory despite slow growth for its southern neighbor—the United States.
Canadian Economic Stats
Canada produced 1.3 trillion worth of goods and services in 2010, making it one of the most productive economies in the world on a per-capita basis.
Main imports include machinery, cars and auto parts, raw crude oil, electricity, and expensive and durable consumer goods.
Canada purchases more of its goods from the United States, China, and Mexico.
Main exports include: finished automobiles, industrial-grade machinery, airplanes and aircraft, electronics, fertilizers, timber, and refined energy sources.
Exports are sent to the United States, the United Kingdom, and China.
Canada’s wealth is not at all difficult to understand. Resource-rich with ample timber, oil, and minerals, the nation is a leading producer of commodities in all types. Built on top of a healthy industrial and mining economy is a vibrant service sector which is responsible for 70% of the country’s economic output.
Canada wasn’t always an economic powerhouse. As the world began to consume more energy, and oil prices rose from $10 a barrel to $100 a barrel from 199x-200x, Canada enjoyed a booming commodity industry. Alongside these gains was the removal of trade barriers which allowed Canada access to the United States’ consumption economy, and the United States’ financial sector had access to Canadian investment possibilities.
Monetary Policy
The Bank of Canada is the nation’s central bank, which can set policies intended to grow or slow economic output and inflation. The deciding body within the central bank is the Governing Council. Made up of six members, their votes are cast to determine monetary policy measures at any point during their daily meetings.
Typically, the Bank of Canada (BOC, later) sets a target inflation rate of 1-3% per year, choosing to regulate inflation with the help of its “bank rate” and open market operations in public debt markets. Primarily, the Bank of Canada uses the Large Value Transfer System to affect interest rate policy. Similar to the international LIBOR rate, the LVTS is a rate at which Canadian banks can lend money to one another.
In moving the LVTS rate up or down, the rate hike or cut then extends to businesses and consumers who borrow money from the banking system. If the BOC raises rates by .5%, then it is only a matter of time before consumer-level rates follow the same uptick to rise .5% or more.
Lower rates help in a similar, but opposite, fashion.
Economic Indicators and Fundamental Releases
There are a few Canadian economic reports which are of interest to CAD trading forex participants:
Consumer Price Index – Much like every other nation around the globe, the Bank of Canada publishes the CPI once per month to determine the rate of change in consumer prices. Rising consumer prices is good, but if prices rise too quickly, than inflation may devalue the Canadian Dollar. On the other hand, falling prices tend to indicate recession, weakness, and deflation.
Ivey Purchasing Managers’ Index – The PMI surveys business purchasing managers to determine the confidence of major corporations in making future investments in the current economic climate. A reading above 50 is said to be a period of growth, and below 50 is a period of contraction. If businesses are not willing to make purchases, it is interpreted to mean that they have little confidence in a growing economy going forward.
Trade Balance – Because the Canadian economy is very much commodity-driven, it is also a leading export. If the balance of trade tips out of the nation’s favor due to falling energy prices, there may be less demand for Canadian dollars. If oil prices are rising, then the trade balance will turn in Canada’s favor, resulting in more demand for Canadian dollars.
Canadian Dollar Movers
External factors can quickly drive the Canadian dollar on the foreign exchange market. Here are a few movers that you should keep on top of:
Direct Investment – Canadian companies often do business in the United States, and US companies do business in Canada. When money moves between borders, it is exchanged into the local currency and out of the foreign currency. Additionally, a Canadian company may purchase a US company in a merger or acquisition, which is essentially a sale of Canadian dollars for US dollars. The purchase of a Canadian company by a US-based company registers a sale of US dollars for Canadian dollars.
Oil prices – Rising oil prices are good for the Canadian dollar, whereas falling oil prices will send the CAD lower.
US Economy – The Canadian export economy is strong, but to whom do the Canadians export most of their goods? The United States. In fact, 80% of all Canadian exports end up in the US, which means that a slowing US economy usually brings about a slowing Canadian economy.
