Forex trading is an increasingly popular option for speculators. Related advertisements claim "commission-free" trading, the market operates 24 hours a day, huge potential returns, and it is easy to create a simulated trading account to practice trading skills. With such convenience comes risk. Forex trading is a huge market, yet every forex trader is competing against thousands of professional analysts and other knowledgeable professionals (many of whom work for major banks and funds). The foreign exchange market is a 24-hour market with no exchanges, and transactions are conducted between banks, brokers, fund managers and other market participants. In recent years, artificial intelligence has transformed the forex market with the introduction of predictive analytics models and machine learning capabilities, helping forex traders gain a huge advantage.
The foreign exchange market is not for the unprepared. Before entering the market, investors should make full preparations. In particular, potential traders need to understand the economic fundamentals of the major currencies in the market, and the particular or unique drivers that affect their value.
Canadian dollar
Seven currencies account for more than 80% of the total volume traded in the foreign exchange market, and the Canadian dollar (often referred to as the "loony" because of the loon on the back of the $1 coin) is one of them, and the fifth largest reserve currency.
The Canadian dollar's currency ranking is a bit of an anomaly, as the Canadian economy (in U.S. dollar terms) is actually the tenth largest in the world. Canada ranks relatively low among major economies in terms of population, but it is the eleventh-largest exporting economy in the world, according to MIT's Economic Complexity Monitor. The Canadian dollar was not a member of the original Bretton Woods system and has always adopted a free floating system. It was not until 1962 that the Canadian dollar depreciated on a large scale and the government was seriously affected. Canada adopted a fixed exchange rate. However, in 1970, high inflation prompted the Canadian government to return to the floating exchange rate system. .
All major currencies in the forex market are backed by central banks. For the Canadian dollar, it is the Bank of Canada. Like all central banks, the Bank of Canada tries to strike a balance between policies to boost employment and economic growth and curb inflation. Although foreign trade is critical to the Canadian economy and the Canadian dollar has a significant impact on trade, the Bank of Canada does not intervene in the Canadian dollar -- the last time the government intervened was in 1998 when it was determined that intervention was ineffective and pointless.
The Economy Behind the Canadian Dollar
Canada's 2017 GDP (in U.S. dollars) ranks 10th, and the Canadian economy has grown relatively strongly over the past two decades, with two relatively brief recessions in the early 1990s and 2009. Inflation has been high in Canada, but better fiscal policy and an improved current account balance have kept budget deficits and inflation low.
When analyzing Canada's economic situation, also take into account Canada's exposure to commodities. Canada is a significant producer of oil, minerals, wood products and grains, and the trade flow of related exports can affect investor sentiment on the loonie. On the Internet, as is the case in almost all advanced economies, relevant data can be easily found through sources such as Agriculture Canada and Agrifood Network.
Although the average age of Canada's population is high by global standards, it is young compared with most other advanced economies. However, Canada's immigration policy is accommodative, and its demographics have not been particularly detrimental to its long-term economic prospects.
Due to the close trade relationship between Canada and the United States (both account for more than half of each other's import and export markets), Canadian dollar traders will pay attention to events in the United States. While Canada has adopted different economic policies, the reality is that it is inevitable that the situation in the United States will affect Canada in some way.
What is particularly noteworthy in relation to the relationship between the United States and Canada is the degree to which the two countries' circumstances diverge. The structure of Canada's financial markets allows it to avoid many of the bad mortgage problems that plague the United States. On the other hand, the low importance of tech companies in the Canadian economy contributed to a relatively weak loonie during the US tech boom of the 1990s. Additionally, the commodity boom of the 2000s (especially oil) contributed to the outperformance of the loonie.
Canadian Dollar Drivers
Economic models designed to calculate the "correct" foreign exchange rate are notoriously inaccurate compared to actual market rates, partly because economic models are often based on a small number of economic variables (sometimes only on a single variable such as interest rates), and traders In the same way that the range of economic data factored into trading decisions is much wider, their speculative expectations can affect exchange rates, in the same way that investor optimism or pessimism can drive stock prices higher or lower than fundamentals suggest value.
Key economic data include GDP, retail sales, industrial production, inflation and trade balance. This information is published on a regular basis and is freely available from many brokers, as well as from numerous sources of financial information such as the Wall Street Journal and Bloomberg. Investors should also keep an eye on employment, interest rates (including scheduled central bank meetings) and daily news - natural disasters, elections and new government policies can all have a big impact on the exchange rate.
Like countries that rely on commodity exports, the performance of the Canadian dollar tends to correlate with fluctuations in commodity prices. In the case of Canada, oil prices are particularly important to the movement of the loonie, and when oil prices rise, investors tend to be long the Canadian dollar and short the currencies of oil-importing countries such as Japan. Similarly, Canada's fiscal and trade policies also have a certain impact on China and other major importers of Canadian raw materials.
Capital inflows will also drive movements in the Canadian dollar. Investor interest in Canadian assets tends to increase during periods of rising commodity prices, and capital inflows can affect the exchange rate. That said, the carry trade has had little impact on the Canadian dollar.
Unique Factors Affecting the Canadian Dollar
Given Canada's relatively healthy economy, Canadian interest rates are high among advanced economies. Canada has a solid reputation for balanced fiscal management, finding a viable middle path between a state-led economy and a hands-off approach. This is important in times of global economic uncertainty - the Canadian dollar is considered a global safe-haven asset, although it is not yet on par with the US dollar as a reserve currency.
While the Canadian dollar is not on the same level as the U.S. dollar as a reserve currency, that is changing. The Canadian dollar is now the fifth most held reserve currency, and holdings are growing.
The loonie is also uniquely linked to the health of the U.S. economy. While the two should not be seen as a one-to-one relationship for traders, for Canada the US is a major trading partner and US policy can have a significant impact on trade in Canadian dollars.
in conclusion
Currency exchange rates are notoriously difficult to predict, and most models rarely work over short periods of time. While economic models are rarely useful for short-term traders, economic conditions do affect long-term trends.
Although Canada is not a particularly large country, nor is it one of the largest exporters of manufactured goods, its economic lifeline is stable and has found a balance between profiting from natural resource wealth and overreliance on related products that may trigger "Dutch disease". balance. As the Canadian dollar increasingly becomes a viable alternative to the U.S. dollar, it should not surprise traders to see the loonie gaining more importance in the forex market.
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