Fundamental Analysis – Explaining the Canadian Economic Data
The Canadian economy is one of the most interesting of them all. It is an energy-driven economy and that says much about the driving factors there. Oil is seen as the one thing that matters for the Canadian GDP (Gross Domestic Product). If oil prices are rising, the more revenues will result in a higher GDP. The same is valid if oil is falling, as the GDP will shrink. This makes the Canadian Dollar an interesting currency to trade. Not only that one should consider the factors that influence the two currencies, but also the oil industry related news: supply and demand, inventory levels, mergers and acquisitions, etc.
What Data Matters for the Canadian Economy?
The Canadian currency is the CAD (Canadian Dollar) and the most important currency pair, is, of course, the USDCAD pair. This is one of the less liquid major currency pairs of them all. The spread on the USDCAD pair is quite high when compared with spreads to be seen at other majors and this is related to the low liquidity levels it has. One cannot exchange big volumes on the USDCAD pair without experiencing slippage at execution. When positions are rolled over from a day to another, the spreads on the USDCAD pair are going wild. Depending on the Forex broker used, at least for the retail market, the spreads can be bigger than full ten pips, and sometimes even more.
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The Overnight Rate
Bank of Canada’s (BOC) interest rate decision is called the Overnight Rate. It is the interest rate at which major financial institutions borrow and lend overnight funds between themselves. Bank of Canada is deciding on interest rates once every eight weeks, following on the Fed and ECB paths. Keep in mind that all central banks in the world are acting under the BIS (Bank for International Settlements) umbrella, so it is no wonder that their actions and calendar look somehow similar. As it is in the case of other major central banks, the interest rate decision is usually priced in the market, so the focus tends to shift to the details provided regarding the future level of rates. Such details are offered as hinted at in the BOC Rate Statement.
BOC Rate Statement
This is the primary tool the Bank of Canada uses to communicate to investors. It is scheduled eight times per years, after the overnight rate is public, and has two parts: one presenting the rate statement, and the other one answering questions from financial press representatives. What matters the most here is that the Bank of Canada’s members are offering clues about the future path of interest rates. The Canadian Dollar is volatile during this statement and the usual caveat applies here too: higher interest rates are met with a bullish reaction on the Canadian Dollar, and lower interest rates are followed by a lower currency. Most of the times the Rate Statement is more important than the rate announcement as well, so this is the one piece of data that is a MUST for CAD traders. That is, besides oil data.
CPI – Inflation
The classical mandate applies to Bank of Canada as well: to keep inflation below or close to two percent. Fighting inflation follows the same path, with higher inflation being met with higher interest rates, hence it is positive for the currency, while lower inflation is being met with lower interest rates, so it should be interpreted as being negative for the currency. Inflation around the world, and in Canada especially, is influenced by the energy sector. Energy prices, like oil prices, are volatile, and often central bankers do not consider them when the inflation levels are calculated. If they are not considered, it doesn’t mean they are not influencing inflation, and, in Canada, this is important, due to the important role the energy sector is having in the GDP outcome.
Oil Data and Prices
Oil prices variation and fluctuation is a huge driver for the Canadian Dollar pairs. Sometimes, nothing else matters for these pairs but how oil is moving and what the oil-related data is showing. The correlation degree is so elevated, that trading oil or the Canadian Dollar is almost the same thing. This is something Forex traders need to consider for avoiding overtrading. The most relevant oil data is the level of inventories in the United States. Keep in mind our reference from the start of the article that mentioned that seventy-five of Canadian exports are going to the United States. Most of those exports are oil related products and different kind of oil products. Hence, changes in the inventory levels in the United States are resulting in sharp movements on the Forex dashboard for the Canadian Dollar pairs. The rigs count number and other oil-related data result in the same behavioral pattern from a fundamental point of view. This is what makes the Canadian economy a special one and the Canadian Dollar a special one to trade and interpret.
GDP (Gross Domestic Product)
The Canadian GDP is released monthly, about sixty days after the month ends, and shows the total value of goods and services the Canadian economy produces. As a side note, this value is inflation adjusted!
PMI – Purchasing Managers Index
As opposed to other parts of the world, in Canada, there is only one PMI indicator that is calculated and released: the Ivey PMI. It is a survey that considers all the sectors in the economy, and it is calculated based on the answers given by 175 purchasing managers. If the outcome is bigger than the 50 level, this is bullish for the currency, while prints below that level show contraction and recession and are bearish for the currency.
Other Important Events
OPEC (Organization of Petroleum Exporting Countries) meetings are worth mentioned here. OPEC represents an oil cartel that keeps control of almost forty percent of the oil production and decisions taken by it can influence oil prices. Because of the strong relationship between the Canadian economy and oil prices, Canadian Dollar traders must know everything about the OPEC meetings dates and the discussions agenda.
Recommended Further Readings
- Forex Trading – Explaining the Concept
– What is forex trading, generalities about trading the currency market.
- Why Trading Forex?
– Advantages and disadvantages of trading the currency market, what are trader’s expectations and what is a realistic approach to follow
- Fundamental Analysis
– Explaining the Australian Economic Data
- Fundamental Analysis
– Explaining the Japanese Economic Data
- Fundamental Analysis
– Explaining the New Zealand Economic Data
Other Educational Materials
- “Infrastructure and Canadian economic growth 1946-1991.” Wylie, Peter J. The Canadian Journal of Economics/Revue canadienne d’Economique 29 (1996): S350-S355.
- Taxes, economic conditions and recent trends in male self-employment: a Canada–US comparison. Schuetze, H. J. (2000). Labour Economics, 7(5), 507-544.