VIDEO LESSON - Introduction to the Canadian Dollar

VIDEO LESSON - Introduction to the Canadian Dollar

13 July 2016, 08:35
Sergey Golubev
There are two dominant themes that it is important to understand when analyzing the Canadian Dollar from a fundamental standpoint. The first, as its designation as a commodity currency implies, is the fact that exports of natural resources (especially gold and oil) make up a significant part of the Canadian economy. This is important to understand because as Canada is the world's 14th largest producer of oil and 5th largest producer of gold, the price of these and other commodities normally has a direct affect on the Canadian Dollar's Exchange rate.

The second thing that it is important to understand here, is the fact that as the Canadian population is relatively small in comparison to its land mass, the economy is heavily reliant on exports, which ties the country more closely together with the international economy as a whole. This is particularly true in regards to economy of the United States, as the US is Canada's largest trading partner, and 81% of Canadian Exports flow to the US.

While many people believe that the US relies most heavily on the middle east for its oil imports, it is actually Canada that is the largest supplier of oil to the United States. As the US is the world's largest oil consumer and Canada is one of the largest producers, fluctuations in the price of oil have double the impact. As we learned in our lesson on trade flows, as the US is a net oil importer and Canada is a net oil exporter, then all else being equal, a rise in the price of oil should strengthen the CAD and weaken the USD.

While exports of commodities are still a very important component of the Canadian economy, the country's service sector has experienced massive growth in recent decades, to the point where the service industry now accounts for 2/3rds of the country's economic output. This is important to understand because, as the United States is its largest trading partner, a slowdown in the US Economy can hurt the Canadian economy and its currency, even if commodity prices remain high.

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