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Understanding The Correlation Between US And Canadian Dollar


The interplay between the US dollar and the Canadian dollar is intrinsically intricate, shaped by several related economic and political matters. 

However, in many instances, the two currencies move in parallel due to the strong trade relationships and responses to similar global events. Also, sometimes differentiations emerge. 

This article examines different aspects that determine the correlation between the American greenback and the Canadian loonie. You will learn how fluctuations in interest rates, oil prices, monetary policy stances, and regional trade disputes can spark periods of alignment or separation between USD and CAD exchange values. 

Whether you are an investor monitoring market trends between neighboring economies or interested in global financial issues, you will be armed with valuable information on this currency pair.

1. Correlation Between Economic Growth And Interest Rates

Strong economic growth and rising interest rates typically strengthen a nation’s currency. You will often see the US dollar vs Canadian dollar move in tandem as both economies experience similar cycles. 

When the US economy is expanding, it provides increased demand for Canadian exports and stimulation for domestic growth across the border. Accordingly, periods of high growth in America tend to coincide with rises for the ‘loonie’ against its US counterpart.

Meanwhile, interest rate policies by the Federal Reserve also transmit influence. The Bank of Canada commonly adjusts its benchmark rate following Fed movements to preserve competitiveness for Canadian exports. 

Should the Fed signal multiple rate hikes over the coming years in response to a robust jobs market and firming inflation, investors will likely be in a position for higher Canadian borrowing costs. This resulting policy divergence squeezes short-term yield advantages for USD holdings. It makes the Canadian dollar comparatively attractive to own on interest rate differentials.

2. Impact Of Oil Price Fluctuations

The Canadian economy relies heavily on exports, with the petroleum sector accounting for about 5 percent of the nation’s GDP. As a result, oil price volatility significantly influences currency fluctuations in the USDCAD pair. 

With improved crude demand and higher prices for petroleum products, more income is generated by Canadian oil companies, which are also invested back into the sector, leading to increased revenue collection for the government through taxes. 

Such an economic “positive shock” helps Canada’s economy excel relative to international expectations, making investors keener on CAD assets.

In contrast, sharp downturns when an oil glut takes hold tend to particularly disadvantage CAD relative to its American neighbor. As energy companies scale back spending and lay off workers during a crude price rout, it negatively impacts growth and business sentiment within Canada tanzohub

Fiscal deficits then expand due to falling Crown royalties, leaving the nation more reliant on external financing. Such conditions encourage outflows of Canadian dollar holdings and trigger depreciating pressures versus the safe-haven USD.

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3. Trade Relations And Geopolitics

Geopolitical tensions involving major trading partners can also move the USDCAD exchange rate. Being so closely integrated with the United States economy, uncertainties surrounding US-China trade disputes or the renegotiation of NAFTA have weighed on sentiment for Canadian dollars in recent years. 

Ongoing tariff issues raise export costs and corporate investment decisions, restraining Canadian activity. Meanwhile, any signs of progress toward resolving such conflicts may spark near-term relief rallies for the loonie.

Likewise, geopolitical risks abroad, such as conflicts involving oil-exporting nations, may disproportionately impact Canada if they interfere with commodity shipments or rattle markets. 

Whereas the United States serves as a significant consumer of last resort, able to offset global demand shocks through domestic growth, Canada remains more reliant on international commerce flows, which leaves it more exposed to disruption. 

Demand for safe-haven USD assets correspondingly rises on an elevated perception of Canadian economic vulnerability during times of heightened risk aversion.

4. Monetary Policy Divergence

The Bank of Canada typically follows the Fed’s lead on borrowing costs. Their policies radically differ on these occasions, which can drive short-term fluctuations in USD/CAD. 

An example in recent history came when oil’s sharp decline in 2014-2015 triggered a downturn across Western Canada that led the BoC to adopt a more dovish stance than its American counterpart and remained committed to gradual tightening. These divergences saw USD strengthen notably against CAD as investors sought higher yields available only in the US.  

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5. Technical Influences

In addition to economic fundamentals, various technical factors also come into play for short-term USDCAD price action. 

Trading ranges, support and resistance levels, candlestick patterns, and momentum indicators all provide clues on a potential near-term direction based on what Wall Street speculators are positioning themselves for. 

For example, sustained breaks above major resistance targets may catalyze trend-following algorithmic funds and retail traders to join long USD/CAD movements.

Meanwhile, unfilled Candlestick gaps on charts represent price levels that pull prices back toward them as former support/resistance zones are tested. These technical signaling effects, combined with Elliott Wave theories or Fibonacci retracements, aid technicians in gauging short-term overbought/oversold conditions, allowing for well-timed entries or exits around anticipated bounces. 

Altogether, technical price action indicators are important overlays on USD/CAD’s fundamental currency correlation story.

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The correlation between the US and Canadian dollar depends on many interrelated economic, geopolitical, and monetary policy dynamics. As interest rates fluctuate, North American trade ties and exposure to shared global headwinds drive macro co-movement. 

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