For currency traders, CME FX futures offer a collection of diverse products and opportunities. Based on popular forex pairs such as the EUR/USD and USD/JPY, FX futures give active traders the ability to gain currency market exposure via standardized derivatives contracts.
One of the most popular CME FX listings is Canadian dollar futures (6C). Based on the USD/CAD forex major, this contract gives participants a way to trade one of the world’s premier commodity dollars.
What Is a Commodity Dollar?
A commodity dollar, or comdoll, is a currency that exhibits a positive correlation to commodity pricing. Accordingly, as the value of said commodity rises or falls, so does the pricing of the commodity dollar. The world’s three major comdolls are the Australian dollar (AUD, gold), the New Zealand dollar (NZD, agricultural), and the Canadian dollar (CAD, crude oil).
The CAD features a strong correlation to the price of crude oil. As a result, the relative value of the CAD and Canadian dollar futures hinges on the performance of WTI crude oil futures (CL). Here are a few reasons why:
- Production: Canada is a global leader in the production and export of crude oil. Outputs stem from the cultivation of massive oil reserves, centered around hydraulic fracturing and the refinement of bituminous oil sands. As a result, Canada ranks as the fourth-largest producer and third-largest exporter of oil in the world.
- U.S. trade: Ninety-eight percent of Canadian oil exports go to the United States. This relationship is vital to the Canadian economy and the relative value of the CAD.
As of 2016, Canada’s oil and gas sector accounted for 5.4 percent of aggregate GDP. So the correlation between the CAD and oil prices is simple: Higher oil prices are good for Canadian economic development and the pricing of Canadian dollar futures.
The Bank of Canada (BoC)
One of the key market drivers of any nation’s currency is its central bank. Central banks are tasked with promoting pricing stability, maximum employment, and economic growth. They accomplish this task by crafting monetary policy, managing interest rates, providing credit, and participating in the capital markets.
The Bank of Canada (BoC) is Canada’s central bank and crafts monetary policy toward the CAD. Its policies can have a tremendous influence on the Canadian dollar in two primary ways:
- Hawkish: Under a hawkish policy, the BoC could raise interest rates, reduce debt purchases, or do both. Subsequently, the CAD would be in a position to gain value against other currencies.
- Dovish: When adhering to dovish policy, the CAD could cut interest rates, expand debt purchases, or do both. As a result, the BoC could see a downturn in valuations against other currencies.
During the onset of COVID-19 in 2020, the BoC took dramatic steps to mitigate the economic fallout of the pandemic. In March 2020, the BoC cut the prime lending rate to 0.25 percent and began buying debt instruments to provide market liquidity. For Canadian dollar futures, the initial shock of COVID-19 and the BoC’s dovish policy was bearish. In the year that followed, the December 2021 6C contract rallied by 15.8 percent (March 2020/March 2021).
Getting Started with Canadian Dollar Futures
Canadian dollar futures can be a great tool for diversification, speculation, or risk management. If you’re going to enter this market, be sure to closely monitor the price of WTI crude oil and changes in BoC policy. These two factors are key drivers of the CAD’s value.
