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Should The Canadian Dollar Be Rising So Quickly?

The Canadian dollar was trading above 80 cents in U.S. funds before the oil shocks took place which sent oil tumbling to around $30 per barrel. The Canadian Dollar went down to around 67 cents early in 2016 before rebounding back to 76 cents where it currently trades. The Canadian dollar has been linked largely with commodities and oil in particular since Canada exports a lot of these things. The second large factor affecting the Canadian dollar in the past has been its fiscal policies and debt situation.

The common explanation for the movement in the Canadian dollar is the price of crude oil. The oil price has dropped from $100 per barrel 2 years ago to around $30 per barrel and now sits at close to $40 per barrel. The fall in oil is about 70% and the subsequent rise in oil is around 25% since its bottom. The Canadian Dollar topped out at 95 cents in U.S. funds two years ago and then bottomed out at 67 cents - it now sits at 76 cents. This represents a 30% decline followed by a 13% rise. The relationships seem to be consistent in terms of tracking the oil price to the Canadian dollar. Should oil return to $100 per barrel, this would correspond to an increase of close to 50% from its current level of $40 per barrel. If the Canadian Dollar follows this move, this would equate to a value of almost $1.2 U.S. Dollars for every 1 Canadian dollar. While this is not far-fetched, it shows that the proportions are a bit off.

In terms of the Canadian national debt, the last few years have not been very favourable. The collapse in oil is threatening to make the debt balloon much higher, combined with a new government that is promising tax cuts and higher spending.

A third possible factor is that Canada is known for is resources - mining and energy. The commodity complex has also crashed over the last two years and is only now getting looked upon for possible investment.

Comparing these results to the Australian Dollar, the picture is very similar. Since Australia is very similar to Canada in terms of its resources, export pattern and proximity to a large trading partner, the consistency is there among similar currencies.

Could there be other reasons this time for the Canadian Dollars' trading pattern? Is the Canadian Dollar rising too quickly? It seems to be, but time will tell if the rates of change will hold up consistently in the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.