What is the relationship between crude oil and the Canadian dollar? How to invest in Canadian dollars?

　　The recent surge in oil prices has become the strongest performing commodity,and the attention is also very high.As the most important strategic resource in the world,crude oil is also the"blood"of modern industry.The importance of crude oil to the national economy and people's livelihood is beyond doubt.While some countries are provoking geopolitical conflicts in order to control crude oil resources,the pricing power of crude oil is also the focus of political and economic struggles among major powers.Oil prices are of great economic significance to crude oil exporting countries,such as OPEC members,Russia,Canada,etc.Exporting crude oil at high prices will bring a lot of foreign exchange income,which is very important to balance the trade balance and maintain economic growth.This article mainly analyzes the relationship between crude oil prices and the Canadian dollar,one of the G7,and how to conduct foreign exchange investment in Canadian dollars.

　　What is the relationship between crude oil and the Canadian dollar?

　　1.First,let's take a look at Canada's trade situation.

　　The Canadian dollar is considered a"commodity currency"because roughly half of Canada's exports come from the export of commodities.Heavy oil,natural gas,coal,iron,nickel,aluminum,lead,zinc,non-ferrous metals,potassium,silicate,sulfur,etc.,but we often hear that"the Canadian dollar fluctuates in the same direction as crude oil"What is going on?

　　Among Canada's exports were fossil fuels,including oil,worth more than$80 billion,or 20.1 per cent of total exports.However,the export is not direct crude oil,most of which are heavy oil sands that need to be refined and processed.The crude oil we often talk about is the US West Texas Light Crude Oil(WTI),while the Canadian dollar is more closely related to the selected oil from Western Canada.(WCS)prices are highly correlated.

　　The unique geographic location of the Canadian dollar allows Canada to have more bilateral trade with the United States than any other two countries.

　　Canada’s total exports to the United States are as high as US$167.746 billion,which is about 75.5%of Canada’s total exports to the United States.Three of the four products exported are exported to the United States.Therefore,the exchange rate of the Canadian dollar is closely related to the strength of the American economy.

　　2.U.S.Canada interest rate differential

　　There are many factors that affect the exchange rate of a currency,the most important of which is the interest rate.Specifically,short-term interest rates determine the(short-term)attractiveness of carry trades to traders.Historical data shows that the spread between the U.S.and Canada,as well as oil prices,usually has a huge impact on the direction of USD/CAD.

　　The chart below is a weekly chart of the USD/CAD currency pair since 2009.The green part represents the 1-year interest rate difference between the United States and Canada(the yields of the two currencies are replaced by the yields of the two countries'government bonds).

　　As shown in the figure above,from April 2009 to the beginning of 2013,the US dollar against the Canadian dollar continued to fall.During this period,the 1-year yield difference between the United States and Canada was negative and continued to decline,so it is not difficult to understand The U.S.dollar is unattractive relative to the Canadian dollar.

　　But then this changed,as by 2014,the US-Canada yield gap started to rise from around-1%(the level between August 2010 and September 2013)to around-0.85%.The rise in the yield gap shows that the U.S.dollar is starting to outperform the Canadian dollar significantly.

　　Meanwhile,oil prices began to plummet in 2014,further supporting the USD/CAD rally.The U.S.dollar began to raise interest rates in 2015,and has begun to cut interest rates so far.The yield gap between the U.S.dollar and the Canadian dollar has begun to decrease from+0.85%,gradually approaching the 0-axis.

　　How to trade the Canadian dollar through crude oil movements?

　　By intuitively comparing the price trends of crude oil and the Canadian dollar(2012-2017),it can be seen that there is a high correlation between the two trends.In other words,there is a relatively long time period(2012-present).high positive correlation.However,as a commodity,the volatility of crude oil,that is,the range of price changes,is far greater than the exchange rate of the Canadian dollar.

　　(Daily overlay chart of Canadian dollar and crude oil prices)

　　Therefore,from the perspective of the big cycle,the trends of the US dollar and the Canadian dollar remain positively correlated most of the time.Generally,the Canadian dollar will rise when crude oil rises,but the Canadian dollar generally does not rise as much as crude oil.After all,the rise of crude oil drives the Canadian dollar.trend.In smaller cycles,especially in the oscillating market,there are sometimes deviations,so when the oil price goes out of the general trend,the trend of the Canadian dollar is more obvious.At this time,we can consider following up Meta operations.

　　One thing to note,we trade and buy and sell currencies in the market mainly through foreign exchange currency pairs.The currency pair of the Canadian dollar is"US dollar against Canadian dollar(USDCAD)",and the latest market price of the United States and Canada is 1 US dollar=1.2300 Canadian dollars.Yuan,the recent high point of the United States and Canada is 1.2600,and it has dropped 300 points to the current price,which is equivalent to an appreciation of the Canadian dollar by 300 points.If it is bullish on the Canadian dollar,it is actually bearish against the US dollar against the Canadian dollar.

　　Similarly,if crude oil rises sharply,the US dollar against the Canadian dollar will fall,and if crude oil falls sharply,the US dollar against the Canadian dollar will rise.Crude oil and the Canadian dollar are positively correlated,but negatively correlated with the US dollar against the Canadian dollar.