It’s likely that you haven’t thought much about the Canadian dollar, other than maybe noticing the prices on the back of books. All of that is about to change.
The Canadian dollar and the US dollar have a special kind of relationship. They’re sort of like that couple that is in a long term relationship but doesn’t actually acknowledge that they’re dating and don’t really hang out in public together.
Early 2016 saw the value of the Canadian dollar and the price of crude oil drop at nearly the same exact time. This is because the Canadian dollar is a petrocurrency, meaning that its value is extremely dependent on the price of oil, since oil is the largest product exported by the country. Oil accounts for 19% of all Canadian exports. Coming in after oil, the second greatest export out of Canada is vehicles at 15%.
This is noteworthy because of the obvious: vehicles run on oil, and the less obvious: the majority of vehicles made in Canada are for American companies like GM, Ford, and Chrysler. Plus, of all the oil that America consumes, most of it is used for transportation.
As the price of oil declines, the value of the Canadian dollar declines along with it. Of course that means that the opposite is true, when oil is valued higher, the value of the loonie increases and so does the Canadian economy as a whole.
Oil is traded as a commodity, meaning that other things factor into the fluctuating price of oil in addition to simple supply and demand since the futures of oil are traded based on how investors anticipate the price will rise or fall. Then, depending on what that anticipated price is, oil producing countries can decide to either increase or decrease production to force an increase in demand and therefore make the price rise. Other things that impact the price of oil are decisions made by OPEC and politics in the Middle East, economic growth of high consumer countries like China, consumer habits (such as how much American are expected to drive in the upcoming summer season), terrorism, and natural disasters.
Canada has the third highest proportion of reserved oil in the world. It’s also the 5th largest producer of oil in the world, but what’s amazing is that it produces only 4% of the total amount produced in the world. The majority of petroleum that Canada produces is imported by the US. On the flip side, 40% of the oil America imports is from Canada. The US and Canada have the largest trade relationship in the entire world. Hundreds of billions of dollars of goods pass over the borders between these two countries.
Think about this for a minute: the US is the largest consumer and importer of oil on the planet. China is the second largest consumer and only goes through about half the amount of oil used per day in the US. In fact, the US is so involved with oil that it is always quoted in US dollars. The US alone is responsible for the consumption of about 25% of the world’s oil production, and 40% of the oil it consumes comes from the Great White North. Considering these factors, it’s not a huge leap to figure out that one way or another, the US has a huge influence in the price of oil and therefore, the economy of any country whose currency is dependent on the price of oil, such as Canada.
So don’t fear when the value of the loonie is down, it’s only a matter of time before the price of oil rebounds, and brings the value of the loonie along for the ride.