The price of the Canadian dollar is impacted by a range of fundamental drivers that affect the supply of, and demand for, the currency. These include:
Monetary policy
When central banks seek to curb excessive inflation, they will often consider raising interest rates to encourage saving over spending in the economy and dampen price rises across goods and services. In turn, higher interest rates attract foreign investment, in this case increasing the demand for CAD and raising its value against other currencies.
An example of this was on July 12 2017, when the Bank of Canada raised rates for the first time in seven years, pushing down USD/CAD from 1.2913 to 1.2422 over the following two weeks.
Oil prices
Oil prices are closely linked with the strength of the Canadian dollar, particularly in the currency pair USD/CAD, due to Canada’s status as one of the world’s biggest oil producers and the pricing of the commodity in USD. When there is a large volume of oil traded from Canada to the US, demand is created for Canadian dollars, pushing up CAD and often pushing down the USD/CAD pair.
A high oil price also means higher USD earnings for Canada on its exports, which also serves to push up CAD. Conversely, lower demand and lower prices reduce the flow of USD into Canada, pushing down CAD and having a bullish effect on the USD/CAD pair. This was exemplified by the March 2020 oil collapse, with CAD falling in turn against a range of currencies.
Of course, balance of trade concerns a range of other raw materials and commercial and industrial products, so traders interested in CAD should keep a finger on the pulse of how Canada’s other key sectors are performing over time.
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Economic data releases/news events
Data releases are capable of conveying fundamental information that may inspire traders to take a position on particular currencies. For example, inflation as measured by the CPI can influence interest rates, as discussed above, meaning traders might expect runaway inflation to trigger rate hikes that see more demand for CAD.
Other measures to look out for are sentiment, which shows whether traders are net long or short, consumer confidence, which can be a benchmark for the direction of the economy, retail sales, services and manufacturing PMIs, and GDP itself, the definitive measure of economic activity.