As an oil-dependent economy, Canada is very exposed to big fluctuations in Oil prices, but going into some of the details will help you understand why the impact is bigger than most traders realise.
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Now, in the questions sections, we've had quite a couple of questions about oil prices and the reason why it's had such a big impact on the Canadian dollar, especially that most recent drop we saw a couple of weeks back.
The main reason for that strong correlation seen in the NWTI vs. CAD, now this is just an example of WTI in the blue, compared to the CAD YING chart. We can see that very strong correlation between the two. Now, the reason why we have such a strong correlation firstly is because Canada is a very oil dependent economy and we can see that crude petroleum is 14% of Canada's total exports.
Now, it's also very important to realize, or to note, that 98% of that is sent across the border to the United States. Now, why is that significant? It's significant because the US is also a very big oil producer themselves, but they produce a WTI, or West Texas Intermediate, and it is a much better quality oil, compared to the very sour and heavy oil seen in Canada which is called Western Canadian Select, or Canada crude oil.
Due to WTI having a much better quality, we normally see a Western Canadian Select oil trading at a very hefty discount, compared to WTI prices. Now, if we just take that into consideration in terms of actual prices right now, we can see WTI's trading at $21 a barrel, but Canadian crude is currently only trading at $4.50.
Now, to put that price into perspective, that means that a barrel of Canadian crude will cost you less than a McDonald's Big Mac meal and that means it costs more money at this stage to ship that oil than it does to buy that oil, which is a big negative for the Canadian oil producers, as well as the Canadian economy, which is why we usually see such a big reaction in the CAD when we have big fluctuations in oil prices.
So always keep in mind that WTI is trading at a certain level, Western Canadian Select or Canadian crude prices will always trade at a hefty discount, which means that drops in oil prices hurts Canada much more compared to the US in terms of the WTI price. And that's just something to keep in mind, why we normally see such a big reaction in the Canadian dollar when we see big fluctuations in oil prices.
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