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Investors’ Guide to Forex Trading With the Canadian Dollar

canadian dollarThe Canadian Dollar is one of the seven currencies that account for more than 80% of the Forex market’s total trading. Sometimes referred to as the Loonie due to the loon that appears on the coinage, the CAD is the sixth most popular reserve currency worldwide, which is somewhat surprising, since the Canadian economy actually ranks only 10th in the world, and Canada has a relatively low population. It does, however, come in ninth in the world for its exports. The Canadian Dollar was a free-floating currency until 1962, and then it became fixed-rate until 1970, at which time it returned to a floating system. The Bank of Canada is the Canadian Dollar’s central bank, and it is responsible for balancing economic growth and employment with inflation. The Bank of Canada has not intervened in its currency since 1998.

The Canadian Economy and its Impact upon the CAD

Canada is the world’s 10th largest economy in terms of its GDP, and has enjoyed strong growth during the past 20 years, despite two brief recessions during the 1990s and in 2009. The inflation rate in Canada is persistently high; however, improvements in fiscal policies have led to a lower budget deficit with lower inflation rates.

The Canadian economy is especially exposed to commodities, being a major producer of minerals, petroleum, grains and wood products, which make up 60% of the nation’s export total. The market for these commodities therefore has a major impact on the value of the Canadian Dollar. Canada also has a strong trading relationship with the US, so any investor interested in the Canadian Dollar should also pay close attention to any political and economic events going on in America too.

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The History of the Canadian Dollar

Before the arrival of the Canadian Dollar, the currency in Canada was the Canadian Pound. There were internal wranglings over whether the country’s monetary system should be based on the Sterling Pound or the decimal system of the US Dollar. It was therefore decided that a Pound Sterling unit would be introduced with coins that would exactly correspond to the US coinage. The gold standard was introduced in 1853, and new coins were introduced in 1858, with the Nova Scotia and New Brunswick colonies also introducing the decimal system in 1860, and Prince Edward Island following suit in 1871. The Uniform Currency Act of 1871 united all of the provinces and replaced the existing currency with the single currency, the Canadian Dollar. Canada’s gold standard was abandoned temporarily during the First World War and was entirely abolished in 1933, and the Canadian Dollar became a floating currency in 1950. After a brief period of being pegged to the US Dollar in 1962, it became a floating currency again in 1970, and this situation stands today. The Bank of Canada was established in 1934 and took over the responsibility of issuing bank notes in denominations of $1, $2, $5, $10, $20, $25, $50, $100, $500 and $1,000. The notes have changed design many times, with the most recent development being the introduction of polymer notes in 2011. Bank notes are printed by the Canadian Bank Note Company under contract to the Bank of Canada.

Which Factors Drive the Value of the Canadian Dollar?

As with all currencies, the value of the CAD is impacted by the release of economic data such as GDP, retail sales information, data regarding industrial production and trade balances, and rates of inflation. Any relevant political or environmental news will also have an impact on the currency exchange rate. As Canada is heavily dependent upon its trade in commodities, it stands to reason that the CAD’s performance is correlated to the direction in which commodity prices are moving. Oil prices are also very significant when it comes to moves in currency values, and it is also wise to keep a close eye on Chinese trade and fiscal policies, as China is one of the biggest importers of Canadian goods. Capital inflow also impacts upon the CAD’s value, and when commodity prices are high, Canadian assets often see increased interest in investment, with the influx of capital impacting on exchange rates.

Unique Factors Impacting Upon Canada’s Economy

Even though Canada’s economic health is relatively good, the nation’s interest rate is quite high when compared to other developed countries. However the country has recently acquired a good reputation for its balanced approach to fiscal management, and this has led to the Canadian Dollar being viewed as a global safe haven, although not as strongly as the US Dollar. The economy of the United States and that of Canada are uniquely tied together as each country is one of the other’s major trade partners. Any change in US policy will therefore necessarily impact on trading prices of the CAD.

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