By Sean Hyman

The USD/CAD (U.S. dollar vs. the Canadian dollar) pair is sometimes called the “bi-polar” currency because it’s driven by Canada’s largest and most influential export – oil. And at other times, it takes its lead from its biggest trading partner, the United States.

The tough part is figuring out if the Canadian dollar (CAD) is trading based on oil prices or the U.S. economy. Usually, when the U.S. economy is in (or nearing) a recession, the CAD slumps because a slowdown in the U.S. usually predicts a slowdown in Canada’s economy. A U.S. slowdown means Canada loses its biggest customer, the United States.

When things are on the “up and up” and the U.S. isn’t facing major economic difficulties, the CAD tends to trade based on oil prices. If oil is headed higher during these times, then the CAD tends to strengthen against the dollar and bring the USD/CAD pair down.

However, the CAD tends to drop and the buck tends to rise when oil is falling (like it is right now). As a result, the USD/CAD pair heads higher.