Rising Gold and Oil Prices Push Canada’s Dollar Higher

Near the end of July 2011, the Canadian dollar (FX symbol CAD) made its low for the year versus the U.S. dollar (FX symbol USD), at just a little better than $0.94 per USD. The high for 2011 came in early October, when each Canadian dollar would be the equivalent of just under $1.07 USD.

Canada is where the U.S. gets the largest percentage of its imported oil and also has some of the world’s largest gold reserves. When the prices of these commodities increase, the Canadian dollar will show strength against other currencies that are net importers of them, as is the case with the U.S.

Another factor that has contributed to strength in the CAD is that the U.S. economy and equities markets have been showing signs of recovery from the downturn instigated by 2008’s housing bubble implosion. As the Dow and S &P continue to climb, the USD becomes less attractive to investors who believe they can get better returns. This means that equity that found the dollar popular for its stability is now seeking green pastures.

With gold prices again threatening $1800 per ounce after hovering around $1700 for several months, and oil prices well north of $100 per barrel heading into peak summer demand, the CAD is currently at a very interesting level, just about halfway between the October 2011 high and the July 2011 low.

USD/CAD currency pair traders will see that the halfway, or the 50 percent retracement point between the high and low for 2011, is essentially right at $1.00 even, which is very nearly where the CAD has spent the month of February.

No one can say for certain which direction the CAD will take with regard to the USD, but if gold prices and oil prices continue to rise, it would indicate a very decent probability that the CAD could test the 2011 high, or at least trend in that direction.

The correlation between the exchange rate for the USD/CAD currency pair, gold, oil and equity indexes has been historically positive, meaning that if the CAD and the U.S. stock market rises, gold and oil will also.

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