The Canadian dollar is considered to be one of the seven forex majors and enjoys a respected standing among currencies worldwide. According to the Bank of International Settlements' (BIS) Triennial Survey, the Canadian dollar stands as the sixth-most frequently traded currency in terms of average daily turnover. Also, it is included in the global reserve basket held by the International Monetary Fund, ranking seventh and credited with deposits totalling US$197.76 billion as of the fourth quarter 2018.
A popular target for short-term traders and longer term investors alike, the Canadian dollar is represented on the forex by ISO currency code CAD. In shorthand, it is symbolised by CAN$ or C$. The Canadian dollar accounts for a substantial portion of daily forex trade, with turnover estimated to be in the neighborhood of US$260 billion.
Frequently referred to as the "Loonie," the CAD is classified by currency traders as being a "commodity dollar." The designation of commodity dollar is largely a product of the CAD's correlation to energy pricing, specifically crude oil and natural gas. This relationship is a prominent aspect of forex trade for the CAD, as energies play an important role in the Canadian economy. Data sets from 2012 show energy production, distribution and exportation accounting for 9.7% of aggregate GDP.
The Bank of Canada (BoC) serves as the Canadian central banking authority and premier CAD advocate. Meeting eight times per calendar year, the BoC implements policy to ensure pricing stability and promote domestic economic growth. The CAD is managed by adjustments to interest rates put forth by the BoC, which are published in its quarterly Monetary Policy Report.
One CAD is divided into 100 equal parts, with the smallest increment being one cent. These cents are distributed in the form of metal coins produced by bureaus of the Royal Canadian Mint in Manitoba, Ottawa and Winnipeg. Coins come in dominations of 1 cent (penny, no longer being distributed), 5 cents (nickel), 10 cents (dime), 25 cents (quarter), 50 cents (no longer being distributed), one dollar (loonie) and two dollars (toonie).
The BoC is the sole issuer of Canadian dollar banknotes. Featured notes are the 5, 10, 20, 50 and 100 dollar bills. Each is polymer-based and features counterfeit protections such as raised ink, transparent windows and metallic symbols and images.
History Of The Canadian Dollar
The earliest documented form of currency in Canada dates back to the 16th century and the exchange of decorative belts commonly known as "wampum." A key component of the North American fur trade, wampum was valued by both European settlers and the indigenous peoples of North America. Due to wampum's scarcity and intrinsic value, it served as a mode of barter for more than a century until the rise of metal specie in the late 1600s.
The first form of paper money adopted in the Canadian territories occurred in New France around 1685. It was nicknamed "playing card money" due to an appearance resembling that of actual playing cards, and it served as a supplement to the short supply of French and Spanish silver coins. Unfortunately, the onset of the Seven Years War (1756-63) brought the unchecked government issuance of similar forms of paper money. Rampant inflation became normal as bills put into circulation by colonial governments were fiat in nature and their value was not guaranteed by a central authority.
Beginning in 1760, Great Britain introduced the British pound sterling to Canada as an official form of currency. For nearly 100 years, pounds, shillings and pence served as a form of legal tender in the Canadian territories. Shortly following the onset of the War of 1812, the pound's status became compromised. Conflict between American and British forces destabilised the monetary systems of North America. During this period In Canada, a mixture of army bills, Spanish dollars, American dollars and American gold coins became accepted as currency.
Upon the Confederation of Nova Scotia, New Brunswick and the Province of Canada on 1 July 1867, officials chose to streamline the monetary system of the new dominion. Using the decimalised U.S. dollar as a template, coins were produced by the Royal Mint (now known as the Royal Canadian Mint) and paper money was issued courtesy of the new centralised government. This framework governed the CAD until the Bank of Canada was founded in 1934, at which time the BoC was commissioned to print and distribute Canadian dollar banknotes.
The Economy Of Canada
Due to its rich concentration of natural resources, Canada existed as a commodity-based economy for hundreds of years. The harvest of furs, timber and precious metals provided sustenance for Colonial settlers. Explosive growth in the manufacturing, mining, energy and service sectors stemming from World War II transformed the rural Canadian economy into an urban one.
The post-WWII era brought a period of economic boom to Canada. From the early 1940s to the 1980s, growth and expansion became commonplace. As a result, the period is commonly labeled "the longest sustained boom in history" by economists. Circa 1950, cultivating more unconventional forms of wealth became a focus of the "new" economy. Energy production, mineral extraction and manufacturing grew consistently as innovative technology and trading partners came online.
Over the decades, energy exploration, extraction and exportation became integral parts of the Canadian economic engine. From the bituminous oil sands of Northeastern Alberta to shale oil/natural gas fracking production, the energy sector plays a leading role in aggregate economic output.
In terms of crude oil, Canada is the fourth-largest producer and exporter in the world. Of the 3.3 million barrels per day exported, 99% of them go to the United States, a primary trading partner. In addition to being a leading producer/exporter, Canada sits on the third-largest known oil reserve in the world, 98% of which are in the form of oil sands. As a leading industrial sector, the energy industry is credited with generating almost 11% of nominal GDP and with supporting nearly 1 million jobs.
On an international basis, the Canadian economy ranks 17th globally in terms of GDP Purchasing Power Parity (PPP). With an annual figure estimated to be around US$1.774 trillion, it sits just above Iran and Australia, and below Spain and Saudi Arabia. Canada's economy relies upon the agricultural, industrial and service sectors to generate a lionshare of output. Technically, it is considered to be service-oriented, with 70% of GDP attributed to the services sector.
As a trade partner, Canada is an international powerhouse in exportation, ranking 11th in the world. The shipping of products such as energies, chemicals, plastics, wood pulp and metals is the backbone of the estimated US$425 billion in annual exports. On the import front, Canada ranks 12th globally, focussing upon machinery, motor vehicles, electricity and durable goods. Prominent trading partners include the United States and China, each ranking first and second in terms of Canadian imports/exports.
Canada's economy exhibits a special sensitivity to commodity pricing, specifically as it relates to exports. As a result, GDP growth and the CAD struggle considerably during periods of global recession or downturn. During the 2008-10 global recession, the Canadian economy regularly contracted by more than 3% quarterly and the CAD lost value. The dependence on commodity pricing was magnified in 2009, when oil prices plunged from north of US$140 to under US$50 per barrel. A period of domestic quantitative easing ensued, leading the CAD to take on a weak posture vs the USD until the onset of 2010.
Active regulation of the financial industry in Canada falls upon several official agencies within both federal and provincial governments. Markets, brokers, banks and insurance companies are all subject to the jurisdiction of sectoral departments.
At the provincial level, governmental bodies are tasked with oversight of investment advisors, credit unions, mutual funds, brokers and insurance companies. Subsequently, each province has a designated securities regulator that relies upon two national bodies as support. The Investment Industry Regulatory Organisation of Canada (IIROC) and Mutual Funds Dealers Association (MFDA) satisfy the majority of organisational requirements; the Canadian Securities Administration (CSA) is tasked with regulation of regional capital markets.
Federally, the Financial Institutions Supervisory Committee (FISC) is the lead body that oversees financial market participants and sets policy in this area. Its organisational structure includes the Department of Finance and four separate federal agencies:
- Office Of Superintendent of Financial Institutions (OSFI): The OSFI supervises all domestic and foreign banks, as well as loan and insurance companies.
- Bank of Canada: The BoC crafts monetary policy facing the Canadian dollar, including interest rate adjustments and the supply of credit.
- Canada Deposit Insurance Corporation (CDIC): Guarantees the funds of bank depositors.
- Financial Consumer Agency Of Canada (FCAC): Enforces consumer protection measures and promotes financial education.
The above listed agencies report directly to the Department of Finance (Minister of Finance) and are indirectly subject to oversight by Canadian Parliament.
Canadian Dollar Currency Pairs
The Canadian dollar is commonly traded in tandem with the six other major global currencies. As a major pairing, the USD/CAD is by far the most popular CAD offering available on the forex. In addition, the CAD is included in several minor pairs, specifically the CAD/JPY, EUR/CAD and GBP/CAD.
Canadian Dollar Bills And Coins
The Canadian dollar is referred to as "the Loonie" in trading circles, due to the picture of a loon (similar to a duck) being present on the CAD$1 dollar coin. Official banknotes come in paper and polymer forms, featuring assorted illustrations of historically relevant Canadians. All coinage features an image of Queen Elizabeth II on the reverse face.
The Canadian Dollar Around The World
The CAD is frequently engaged by traders and investors seeking exposure to the commodity markets, specifically crude oil. Political stability and historically consistent economic performance in Canada are positive attributes that attract interest to the CAD. It is the official currency of all 10 Canadian provinces and three official territories. In addition, the Loonie is periodically accepted as payment by American entities geographically close the U.S./Canada border.
Where Is The Canadian Dollar Today?
Since the global financial crisis of 2008, the CAD has experienced periods of valuation and devaluation in concert with BoC policy. Bank lending rates as low as .5% have negatively impacted values of foreign exchange. However, from 2008 to 2019 bank rates were typically held between 0.5% and 2%, ensuring relative stability against other major global currencies.
Canadian economic prowess is rooted in the commodity complex. The exportation of crude oil, natural gas and agricultural goods to trading partners are key drivers of performance. Thus, international trade conflicts and agreements wield considerable influence on the economy as a whole.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…