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 Gross Domestic Product (GDP). If oil prices are rising, the increase in 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 should one 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 Canadian Dollar (CAD) and the most important currency pair is, of course, the USD/CAD pair. This is one of the least liquid major currency pairs of them all. The spread on the USD/CAD pair is quite high when compared with spreads to be seen with other majors, and this is related to its low liquidity levels. One cannot exchange large volumes on the USD/CAD pair without experiencing slippage at execution. When positions are rolled over from one day to another, the spreads on the USD/CAD pair go wild. Depending on the Forex broker used, at least for the retail market, the spreads can be bigger than 10 full pips, and sometimes even more.

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The Overnight Rate

The 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. The Bank of Canada decides on interest rates once every 8 weeks, following on the Fed and ECB paths. Keep in mind that all central banks in the world act under the umbrella of the Bank for International Settlements (BIS), so it is no wonder that their actions and calendars 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.
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BOC Rate Statement

This is the primary tool the Bank of Canada uses to communicate to investors. It is scheduled 8 times per year, after the overnight rate is made public, and has two parts: one presenting the rate statement, and the other answering questions from financial press representatives. What matters the most here is that the Bank of Canada’s members offer 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 time 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 the Bank of Canada as well: to keep inflation below or close to 2%. Fighting inflation follows the same path, with higher inflation being met with higher interest rates, and hence it is positive for the currency; while lower inflation is met with lower interest rates, which 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, such as oil prices, are volatile, and central bankers often do not consider them when the inflation levels are calculated. If they are not considered, it doesn’t mean they are not influencing inflation, though, and in Canada this is important due to the important role the energy sector plays in the GDP outcome.

Oil Data and Prices

Oil price 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 to avoid 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 75% of Canadian exports go to the United States. Most of those exports are oil-related products, and different kind of oil products. As a result, changes in the inventory levels in the United States result 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 behavioural pattern from a fundamental point of view. This is what makes the Canadian economy a unique one, and the Canadian dollar a special one to trade and interpret.

Gross Domestic Product (GDP)

The Canadian GDP is released monthly, about 60 days after the month’s end, and shows the total value of goods and services the Canadian economy produces. As a side note, this value is inflation-adjusted!

Purchasing Managers’ Index – PMI

Unlike in 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 higher 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

Meetings of the Organization of Petroleum Exporting Countries (OPEC) are worth a mention here. OPEC represents an oil cartel that keeps control of almost 40% 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.

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