Canadian dollar leads ECB fixings with oil above $100: commodity currencies

The Canadian dollar was the biggest mover among the majors in the European Central Bank's reference rates for Monday, 19 October. The USD/CAD fixing fell 0.61% to 1.4074 from 1.4161 on 16 October, meaning the US dollar bought fewer Canadian dollars, while the Australian dollar also gained as oil prices stayed above $100 a barrel.

The drivers are mixed, so it helps to be careful. According to investingLive's Americas wrap, WTI crude rose $2.37 to $103.78 late in the day after US and Houthi attacks, with the Aussie leading and the yen lagging. Earlier, investingLive's European wrap said risk sentiment improved on falling oil. And investingLive reports that Canada's September inflation came in at 3.1% against 3.2% expected, which it called a negative for the Canadian dollar. The ECB fixing is one snapshot per day, so it does not capture every one of these moves. Our sister site has a wider look at how the oil rebound lifted US yields and hit the yen.

What is a commodity currency?

A commodity currency is the money of a country that earns a large share of its income from exporting raw materials, such as oil, metals or farm goods. The Canadian dollar (nicknamed the loonie) is linked to oil. The Australian dollar (the Aussie) and New Zealand dollar (the kiwi) are often grouped with it because of their own resource and farm exports.

The idea is simple. When the price of a country's main export rises, foreign buyers need more of that country's currency to pay for it. That extra demand can support the currency. When the export price falls, the support can fade.

This is a tendency, not a rule. Interest-rate expectations, inflation data and global mood can all push the other way, as Monday's soft Canadian CPI showed.

A worked example

USD/CAD tells you how many Canadian dollars one US dollar buys. A lower number means a stronger Canadian dollar.

• Fixing on 16 October: 1.4161
• Fixing on 19 October: 1.4074
• Change: 1.4074 minus 1.4161 = minus 0.0087, or 87 pips (a pip is 0.0001 here)
• Percentage: 0.0087 divided by 1.4161 = about 0.61%

Now picture a US company that needs Canadian dollars. Converting $10,000 at the 16 October fixing gives 10,000 x 1.4161 = 14,161 Canadian dollars. At the 19 October fixing it gives 10,000 x 1.4074 = 14,074 Canadian dollars. That is 87 Canadian dollars less for the same US dollars, because the loonie got stronger.

The move is part of a longer run. The USD/CAD fixing is down 1.32% compared with the 12 October fixing, and it has fallen at every fixing this week, from 1.4241 on 13 October.

The Aussie moved the same way. AUD/USD rose from 0.6959 to 0.6986, a gain of 0.0027, or 27 pips, which is 0.39%.

You can follow both pairs on the USD/CAD chart and the AUD/USD chart.

Why it matters for new traders

If you trade the loonie or the Aussie, the price of oil and metals is part of your homework. A big swing in crude can move USD/CAD even on a day with no Canadian news.

But do not treat the link as automatic. On Monday, oil fell in the European session and rose in the US session, while Canadian inflation came in below forecast. Several forces pulled in different directions within one day. Checking the timing of each event against the timing of the price move helps you avoid false explanations.

Remember also that the quote direction matters. In USD/CAD the Canadian dollar is the second currency, so a stronger loonie shows up as a falling number. In AUD/USD the Aussie comes first, so a stronger Aussie shows up as a rising number.

Key terms

• Commodity currency: a currency whose value tends to follow the prices of its country's main raw-material exports.
• Loonie: market nickname for the Canadian dollar.
• WTI: West Texas Intermediate, a benchmark US crude oil price.
• Pip: the smallest standard price step, 0.0001 for USD/CAD and AUD/USD.
• Reference rate (fixing): the ECB's single official daily rate, not a live trading quote.