Nothing infuriates Canadians more than the sense Americans are ignoring them. This indignation is justifiable in light of the importance of the U.S.-Canada bilateral trade flow; each country is the other’s largest trading partner. The Canadian dollar (CAD) is an important financial variable, too. Not only does it account for 9.1 percent of the benchmark dollar index (DXY), but it occupies a unique role therein. None of the five other currencies in the DXY can claim the CAD’s combination of dependence on cross border trade and investment flows and interest-rate differentials and commodity linkages. Once we understand what drives the CAD, we have a critical piece in place for understanding the DXY.
The CAD is and has been stronger against the U.S. dollar (USD) than can be accounted for by interest-rate differentials alone. Commodity prices are a contributing factor. And while the euro and Japanese yen, with their 57.6-percent and 13.6-percent weights in the DXY, respectively, garner the lion’s share of attention, the CAD has been the strongest performer against the USD since the Jan. 4, 1999 introduction of the euro. Canadians may note this has escaped the attention of the financial headline writers.
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