Canada’s oil sector amounts to about 10% of its GDP and 25% of its exports, almost all of which go to the U.S. It’s not too surprising, then, that the U.S./Canada exchange rate mirrors the price of oil. Of course, trade between the countries is much more than oil, but many of Canada’s other commodity exports have a price that is well correlated with the price of oil. And the financial linkages between the countries are also disproportionately tied to the mining and extractive industries.
That said, this relationship hasn’t always existed. See the graph: If you expand the time sample to more than the 10 years shown above, the correlation becomes gradually less clear. But the reason is clear: Canada has continuously expanded its oil production, and oil simply did not matter that much a few decades ago when it was not nearly the dominant revenue source it is today.
How this graph was created: Look for the Canadian/U.S. dollar foreign exchange rate and select the monthly series. Then use the Add a Series option to search for and select “WTI” (again, the monthly series). Modify this second series as follows: Switch the y-axis to the right side and create you own data transformation with formula 1/a. Finally, restrict the graph’s sample period to the past 10 years.
Suggested by Christian Zimmermann and inspired by a tweet from Paul Storer, who recently passed away