Oil Prices affect CAD positively. In other words, if the price of crude oil goes down, the Canadian dollar also decreases and vice versa.
There’s a positive correlation between the oil prices and the Canadian dollar.
Oil Prices and Canadian Economy
As prices of oil rise,
More of the CAD is demanded by the investors to purchase oil hence a boom in the Canadian economy increasing the value of the CAD .
The price fluctuations of oil is as a result of forces of demand and supply for oil both locally and internationally.
Oil prices affect CAD since Canada majorly depend on oil for its economy, change in oil prices greatly affect its economy.
Canada is one of the largest producers of oil and exporter in the world. At least about 85% of its oil going down south neighbor(USA).
Oil prices and the U.S. Economy
Crude oil is priced in U.S. dollars (USD). Therefore for every oil transaction made, A dollar is exchanged.
In this case,
When the price of oil rises, Canada oil companies receive more U.S. dollars.
Since they will have to exchange U.S. dollars for Canadian dollar on foreign exchange markets, supply of the U.S. dollars becomes more and creates demand for more Canadian dollars.
Also, the U.S crude oil inventories.
The Crude Oil Inventories represent changes in the number of barrels held in Inventory in the US.
When the prices of oil rise, it requires more U.S.dollars to purchase a few barrels of oil.
This increases supply of the U.S.dollar on the market hence fall in its value.
On the other hand, if the prices of oil fall, it requires less of U.S.dollars to purchase more barrels of oil.
How Oil Prices move with the USD/CAD
When the price of oil rises, the value of the Canadian dollar ( loonie) also usually rises relative to that of the U.S. dollar.
Increase in demand for consumption in the US, increases demand for oil from Canada, leading to rise in prices of oil and value of CAD. The opposite is true.
Increase in demand for oil from Canada to the US, lead to high prices of oil, more supply of USD and high demand for CAD hence currency(CAD) value addition.
In short, When oil prices go up/rise, USD/CAD goes down/falls.
When oil prices go down, USD/CAD goes up.
As a Forex trader
This gives you an opportunity to short the USD/CAD when prices of oil are rising.
Alternatively, buy the USD/CAD pair, when oil prices fall.
In Conclusion,
An increase in demand for oil by the US economy leads to increase in oil prices.
This increases demand for the Canadian Dollar and supply for the US dollar.
As a result the CAD appreciates in value and the US Dollar falls in value. However, the reverse is true.
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