The Canadian dollar has two drivers: central bank policy and the price of oil.
Central bank policy
The Bank of Canada is meeting next week to decide its current interest rate. The Bank of Canada surprised markets in December with a more bullish outlook than the market was expecting. The BoC highlighted surprising strength in business investment and the economy was operating ‘near capacity’. The key area of concern for the BoC in December was global trade tensions. With the optimism concerning the US-China phase 1 trade deal still in the market, it seems that the Bank’s concern has receded for now, at least from between the US and China. If this situation remains, I am expecting the BoC to lean towards a more bullish outlook when it meets on Wednesday next week at 1500GMT.
The price of oil impacts CAD. With Canada being a key exporter in oil, increases in oil prices help boost the CAD. The negative correlation between oil and the USDCAD pair is around 96%. So, this means that a fall in USDCAD usually results in a rise in oil and vice versa. Take a look at the chart below to see the relationship.
Going forward, the path of CAD will continue to be determined by these twin influences of the central bank and the price of oil. Whenever you are trading CAD you always want to know what is happening with these two key drivers. Ideally, to place a CAD trade, you want both drivers to complement each other. A bullish central bank meeting next week and a rise in oil prices would be supportive of oil prices going forward. Similarly, a bearish central bank meeting and a fall in oil prices would result in CAD weakness.