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
View on FRED, series used in this post:
Canadians are heading to the polls on Sunday, October 18, 2015, to elect a new parliament and government. Voters often consider the current state of the economy during election season, and FRED can help you track the economic situation for the U.S.’s neighbor to the north. Although data from Statistics Canada aren’t included in FRED, plenty of Canadian data from other sources are available, although sometimes with a delay. At the time of this writing, the tag for Canada has 2226 series listed in FRED.
The graph above shows some of the economic aggregates that are likely to matter the most for Canadians: the unemployment rate, GDP, inflation, and the exchange rate with the U.S. dollar. Canada did relatively well during the previous recession, at least compared with the U.S. Unemployment has remained relatively high, though, and the economy is currently suffering from the massive decrease in several commodity prices, which is readily visible with the weakening of the Canadian dollar. If you are reading this blog post some time after it was published, the graph will have updated automatically with the latest data. And, reader from the future, you will be able to see how the Canadian economy has fared and know whether the conservative government was reelected.
How this graph was created: Search by using the Canada tag, select the four series shown in the graph, and click “Add to Graph.” Three of these series need a little attention: CPI and GDP need to be expressed as growth rates, which is done by opening their respective panels and selecting “Percent Growth Rate from Previous Year” under “Units.” Finally, the axis for the exchange rate needs to be moved to the right because the unit range is so different from the others.
Suggested by Christian Zimmermann.