For currency traders, CME FX futures contracts offer a variety of products and opportunities. Based on popular forex pairs such as EUR/USD and USD/JPY, forex futures give active traders the ability to gain exposure to the currency market through standardized derivative contracts.
The Canadian Dollar (6C) futures contract is one of the most popular CME FX listings. Based on the major foreign currencies of the USD/CAD pair, this contract gives participants a way to trade one of the world’s commodity dollars.
What is a commodity dollar?
A commodity dollar, or comdoll, is a currency that shows a positive correlation with the pricing of commodities. Accordingly, as the value of the said commodity rises or falls, so does the price of the commodity dollar. The three major countries in the world are the Australian dollar (AUD, gold), the New Zealand dollar (NZD, agricultural), and the Canadian dollar (CAD, crude oil).
The Canadian dollar has a strong correlation with the price of crude oil. As a result, the relative value of the Canadian dollar and Canadian dollar futures contracts depends on the performance of the WTI Crude Oil (CL) futures contract. Here are some of the reasons:
- ProduceCanada is a world leader in the production and export of crude oil. The output stems from the cultivation of huge oil reserves, centered on hydraulic fracturing and refining of bituminous oil sands. As a result, Canada ranks fourth among the world’s largest oil producer and third largest exporter.
- American trade: Ninety-eight percent of Canada’s oil exports go to the United States. This relationship is vital to the Canadian economy and the relative value of the Canadian dollar.
As of 2016, Canada’s oil and gas sector accounted for 5.4 percent of its total GDP. So the relationship between the Canadian dollar and oil prices is simple: higher oil prices are good for Canadian economic development and the pricing of Canadian dollar futures contracts.
Bank of Canada (BoC)
The central bank is one of the main drivers in the market for the currency of any country. Central banks are tasked with promoting price stability, maximum employment, and economic growth. They accomplish this task by formulating monetary policy, managing interest rates, providing credit, and participating in the capital markets.
The Bank of Canada (BoC) is the central bank of Canada and formulates monetary policy towards the Canadian dollar. Its policies can have a tremendous impact on the Canadian dollar in two primary ways:
- Hawk: Under a tight policy, the Bank of Canada could raise interest rates, reduce debt purchases, or do both. After that, the Canadian dollar will be in a position to gain value against other currencies.
- dovesWhen sticking to a cautious policy, the Canadian dollar can lower interest rates, expand debt purchases, or do both. As a result, the Bank of Canada may see a drop in valuations against other currencies.
During the onset of COVID-19 in 2020, the Bank of Canada took dramatic steps to mitigate the economic fallout from the pandemic. In March 2020, the Bank of Canada lowered its key lending rate to 0.25% and began buying debt instruments to provide liquidity in the market. For Canadian dollar futures, the initial shock of COVID-19 and the Bank of Canada’s cautious policy were bearish. In the year since, the December 2021 6C contract is up 15.8% (March 2020/March 2021).
Getting started with Canadian dollar futures
Canadian dollar futures contracts can be a great tool for diversification, speculation or risk management. If you are going to enter this market, be sure to keep a close eye on the price of WTI Crude Oil and changes in BoC policy. These two factors are the main drivers of CAD value.
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