Will crude oil cause a Canadian dollar crash?
Key points
- Crude oil is down 14% since October 19th
- Canadian dollar and crude oil are positively correlated, historically
- US dollar demand has recently influenced USD/CAD more than changes in crude oil prices
The energy sector and Forex markets are currently in a unique trading environment, especially for crude oil and the Canadian dollar. Currently, CAD and crude oil share a positive correlation of +0.30. With the recent decline in oil prices, the current market conditions may potentially lead to a crash in the Canadian dollar.
How might crude oil prices affect Canadian dollar?
Crude oil prices have fallen by 14% since October 19th, moving from nearly $90 a barrel to $75 a barrel in less than a month. Many are speculating whether this decline will continue to more historically normal prices for crude oil in the 60s or low 70s ($/barrel).
The global fear of an economic recession is beginning to impact markets like crude oil, which are largely dependent on demand from economies such as China, Europe, and the United States. Recent geopolitical turmoil, such as the war in the Middle East and the Russian-Ukrainian conflict, has been a another significant factor in keeping crude oil prices high. However, market sentiment suggests that the risk around crude oil has lessened over the last few weeks.
Over a 15-year period, the correlation between crude oil and the Canadian dollar has been exclusively positive. For instance, from 2010 to 2015, when crude oil was trading around $90 to $100 a barrel, the Canadian dollar was trading around parity. Similarly, when crude oil prices fell to lows in 2020, the Canadian dollar weakened against US dollar - with USD/CAD reaching highs above 1.4000.
However, recent trends seem to indicate a deviation from this historical correlation. Despite crude oil prices reaching over $100 a barrel in 2022 due to geopolitical tensions and inflation, the Canadian dollar did not rally as much as historical precedent would suggest. The strength of the US dollar, influenced by its aggressive interest rate hikes and outperformance of global economies, including Canada, may be a contributing factor to this deviation.
In this new environment, if crude oil prices continue to fall and geopolitical tensions ease, the Canadian dollar could potentially reach new lows. The US's strength from an economic and interest rate perspective could exacerbate this decline. On the other hand, if crude oil prices stabilize and the interest rate environment in the US weakens, the Canadian dollar could potentially strengthen.
At present, the historical correlation between crude oil and the Canadian dollar cannot be ignored, but the current market conditions present a unique and nuanced environment. It remains to be seen how these factors will play out, but forex traders should keep oil prices in mind to prepare for potential significant moves in USD/CAD and other markets.
How to trade USD/CAD
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions on USD/CAD
Trading forex requires an account with a forex provider like tastyfx. USD/JPY can be found in tastyfx's platform under the 'Major' pairs tab. Many traders also watch major forex pairs like GBP/USD and AUD/USD for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.
You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.
Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.
This information has been prepared by tastyfx, a trading name of tastyfx LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. tastyfx accepts no responsibility for any use that may be made of these comments and for any consequences that result. See our Summary Conflicts Policy, available on our website.
