Commodity Prices and Yield Spreads: Why the CAD’s Rise Wasn’t a Surprise for Experienced Traders

 As someone who’s been through enough market cycles to recognize patterns, the recent rise of the Canadian dollar to a five-month high doesn’t surprise me, but it does remind me of a lesson I wish I’d learned earlier. The correlation between commodity prices and the CAD has been well established, yet the full impact of that dynamic didn’t hit me until years into my trading career. Oil prices climbing, narrowing yield spreads between Canada and the U.S., and positive economic data were all signs pointing towards a potential strength for the loonie. But back then, I was too focused on short-term data like factory sales, which, while important, weren’t the primary drivers. In this case, the CAD’s resilience wasn’t tied to domestic factory sales but rather to global factors like oil and the USD’s broader weakness. For me, this is a reminder that, in trading, a broad understanding of global influences often outweighs narrow domestic data.

For years, I overlooked how narrowing or widening yield spreads could provide a much clearer picture of a currency’s strength. The gap between Canada’s and the U.S. bond yields narrowing had a significant impact on the CAD, especially in the face of stronger commodity prices. It took me a while to grasp how these subtle indicators play a crucial role in determining the direction of currencies. This experience has taught me to pay more attention to bond market movements and their correlation to currency pairs — especially in the context of central bank policy and international trade. The bond market isn’t just for fixed-income investors; it has an undeniable impact on currency trading, too.