Canadian dollar and oil prices always move together. If the price of crude oil goes down, the Canadian dollar goes down (relative to the U.S. dollar). If the price of crude oil goes up, the Canadian’s dollar worth is more. Why does it happen?
Why do oil prices and the Canadian dollar move?
There are two facts that have to be kept in mind:
- The price changes in oil are caused by international factors outside of Canada, since oil is an internationally traded commodity and since Canada is smaller than the U.S. and EU.
- Since the demand for oil is unyielding in the short run, a rise in oil prices causes the dollar value of the oil sold to rise.
Canada, one of the top oil producers in the world, exports around 2 million barrels of oil a day to the United States. This makes it the largest supplier of oil to the U.S. If the price of a barrel of oil is $50 U.S., that is $100 million (U.S.) in purchases that occur every day. Because of the weight of sales involved, any changes to the price of oil have an impact on currency market.
How Canadian dollar affects oil
The top correlation between the Canadian/US dollar exchange rate and oil prices is due to the big portion of the nation’s total foreign exchange earnings is acquired through crude oil sales. When oil prices are high, the amount of U.S. dollars earned by Canada on each barrel of oil exported will be high, and therefore the supply of U.S dollars will rise relative to the supply of Canadian dollars, resulting in an increase in the value of the Canadian dollar.