USD/CAD Trading

The USDCAD is the ticker for the US dollar (USD) to the Canadian dollar (CAD) exchange rate in the forex trading markets. This currency pair belongs to the “majors” group as it contains the US dollar, which is recognised as the most powerful and popular currency in the world.

The major currency pairs are the most frequently traded on the Forex market, and as a result, they have huge daily trade volumes, enjoy tighter spreads and are more liquid than the minor currency pairs.

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Reading the USD/CAD Price

The USDCAD currency pair represents the price of the base currency (USD) in relation to the quote currency (CAD). The USDCAD is an exchange rate that specifies how many CAD can be converted into one USD.

To put it into perspective, when the price of the USDCAD pair is rising, it means that the USD is strengthening over the value of the Canadian dollar. When the opposite happens, that is, the price of the USD/CAD is falling, the Canadian dollar is increasing in value in comparison to the USD.

As stated above, the price quote of the USD/CAD essentially represents the number of dollars it would take to acquire one Canadian dollar. For example, if the USD/CAD exchange rate is 1.32, it means that 1 USD is equal to 1.32 Canadian dollars.

Trading The “Loonie”

Between 1854 and 1914, the Dominion of Canada was under the gold standard. At that time, the value of the Canadian dollar was fixed in terms of gold, and it was valued at par with the U.S. currency. This marked the beginning of trading between the USD and the CAD.

The USD/CAD forex pair is popularly referred to as the “Loonie.” “Loonie” is a colloquial term that refers to the Canadian dollar coin. The Loonie gained its name from the picture of a bird, known as a loon, which appears on the back of the coin.

Trading the Loonie requires a deep understanding of the various factors that affect the values of the US and Canadian dollars, both in relation to each other and in relation to other global currencies.

For instance, the interest rate differential between the Bank of Canada and the US Federal Reserve will affect the two currencies’ values in relation to each other. Whenever the Federal Reserve intervenes in activities on the open market, in a bid to strengthen the US dollar, the USD/CAD cross will see its value increase because it will take more Canadian dollars to buy a stronger US dollar.

The exchange rate of the USD/CAD can also be affected by other economic and political forces on both sides of the border. For example, factors that can impact the CAD include commodity prices, such as oil and zinc, the interest rates of the country as set by the Bank of Canada (BoC), employment rate, national debt levels and budget deficit, as well as the quality of the relations between the US and Canada.

Meanwhile, the rate of the USD could be impacted by the interest rates as set by the Federal Reserve, the unemployment rate in the US, the Gross Domestic Product (GDP) growth rates, international trade agreements, duties and tariffs, political events, consumer saving and household income rates and much more.

It is also important to also note that the USD/CAD currency pair has a negative correlation to the AUD/USD, GBP/USD and NZD/USD crosses since their quote currency is the USD.

USD/CAD Historical Highs and Lows

There is a high correlation between commodity prices, especially oil, and the value of the CAD. Since Canada’s economy is heavily reliant on oil exports, oil trading prices dictate the health of the Canadian economy and the value of its currency. In 2016, the price of oil slumped to a low not seen in decades, trading at less than $30 per barrel. At this time, the Canadian dollar also sunk to a low of 1.46 CAD to the US dollar.

Historically, the Canadian dollar reached an all-time high of 1.61 in January 2002 and a record low of 0.92 in November 2007.

The Effect of The NAFTA Agreement on the USD/CAD

After months of negotiations and fiery rhetoric, the North American Free Trade Agreement (NAFTA) was replaced in September 2018. Rebranded as the USMCA (United States-Mexico-Canada Agreement), the United States and Canada came to an agreement that would see Canada join a trilateral trade pact between Mexico and the United States.

Unsurprisingly, the negotiations and the agreement have had a big impact on the money markets in general, and the USD/CAD in particular. During months of negotiations, there was a high degree of volatility with sentiment swaying in favour of the US or Canada, and it affected the value of the currency pair. After the deal was announced, the value of the CAD soared, resulting in a four-month low for the USD. The Canadian dollar rose about 0.7%, reaching a four-month high of C$1.2814, before giving up some gains.

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As one of the most heavily traded currency pairs, the USD/CAD bears close watching at all times by forex traders. The close economic ties between the U.S. and Canada, combined with the large amounts of natural resources produced by Canada can make this pair very volatile at times. Rapid moves of several hundred pips are not unusual in the USD/CAD pairing. Note that the pair is particularly sensitive to oil prices, with the Canadian dollar often rising and falling in tandem with crude oil prices.

As you might have guessed, the best time to trade this pair, when the greatest liquidity and volatility is experienced, is during the North American trading session. That’s when both U.S. and Canadian traders are most active. Interestingly the pair also achieves its greatest daily volatility on a Friday, perhaps due to traders adjusting positions heading into the weekend. Traders will also see some activity in the pair at the start of the Asian sessions, although in general this is typically quite limited.

The USD/CAD has a tendency to make strong moves rapidly and then spend a considerable period of time consolidating. This has led to the popularity of trading the pair based on some simple technical strategies. One of these is to trade the pair based on bounces from the trend lines or from support and resistance levels. This is a steady strategy that delivers many small profits over time. Another more aggressive strategy is to watch for the inevitable breakout moves from the pair that can deliver large profits in a short period of time.