Canadian Dollar and Oil Prices

Canada had been in a six month bind last 2015, with the Canadian dollar declining by 12 percent which was relative to the U.S. dollar. Coincidentally, the prices of oil plummeted by 48 percent. This shows that the drop in oil prices has a correlation with the value of the exchange rate between the Canadian and United States dollar, which has been around for some time now. This correlation, which extends to how the Canadian dollar is tied to the United States dollar, can rationalize how Canada is able to earn U.S. dollars.

Additionally, this high correlation is an indicator that during the long run, there is a heightened chance that an increase in the prices in oil will bring the value of the Canadian dollar up with it.

A large portion of Canada’s U.S. dollar income and its total foreign exchange earnings stems from the country’s sale of goods that are energy based to other parts of the world, particularly to the United States. With Crude oil being the largest, most prominent, and sole contributor of foreign exchange to Canada. The country has also seen an extensive growth in its shares with the growth of oil sands.

Last 2015, ten percent of Canada’s total current receipts, which is a representation of all the foreign exchanged from the sale of the country’s goods and services, is accredited to the income generated by crude oil.

As with all commodities, the price of crude oil is determined by the law of supply and demand, and in the case of both the Canadian and U.S. dollar exchange rate, their values are also determined by the law of supply and demand because of their close correlation to the prices of oil.