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October 10, 2008

Oil Prices and the Canadian Dollar


Have you noticed the Canadian Dollar and Oil Prices always move together?

Since oil is an internationally traded commodity and since Canada is so small relative to the United States and the EU, price changes in oil are caused by international factors outside of Canada.

Canada exports around 2 million barrels of oil a day to the United States. If the price of a barrel of oil is $50 U.S., that is $100 million (U.S.) in purchases that occur every day. Because of the magnitude of sales involved, any changes to the price of oil has an impact on currency market.

When the price of oil goes up, Canadian oil companies receive more U.S. dollars. Since they pay their employees (and taxes and many other expenses) in Canadian dollars, they need to exchange U.S. dollars for Canadian ones on foreign exchange markets. So when they have more U.S. dollars, they supply more U.S. dollars and demand more Canadian dollars. The increase in supply of the U.S. dollar drives the price of the U.S. dollar down. Similarly, the increase in demand for the Canadian dollar drives the price of the Canadian dollar up.

The same is equally true when the price of oil drops, the Canadian dollar also drops in value because oil companies don't need as much.

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