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A Guide to USD/CAD Trading

TABLE OF CONTENTS

A Guide to USD/CAD Trading

A Guide to USD/CAD Trading

Vantage Updated Updated Fri, 2024 May 24 01:37

USD/CAD is one of the major currency pairs traded in the forex market globally. Eight currencies account for over 80% of the total forex market volume, of which the Canadian dollar is the sixth most held currency as a reserve [1]

Due to Canada’s reliance on commodity exports such as oil, natural gas and minerals, the Canadian dollar (CAD) is often referred to as a “commodity currency”. This means that the price of commodities, especially oil, have a direct influence on the Canadian economy and the value of the Canadian dollar.  

The CAD is known as the “loonie”, a nickname derived from the image of a common loon on the one-dollar coin which has been in circulation since 1987.  

What is USD/CAD Trading?  

Trading USD/CAD involves buying and selling the currency pair in the foreign exchange market -more specifically, the US dollar against the Canadian dollar.  

Individuals who participate in USD/CAD trading aim to profit from fluctuations in the exchange rate by buying low and selling high. 
 
Additionally, traders can also profit from declining prices by shorting the currency pair, which involves selling the major, with the expectation of buying it back at a lower price. 

USD/CAD History 

The US dollar (USD) is the world’s primary reserve currency and has a history dating back to 1792 when the United States Congress established it as the country’s standard currency. It is paired with all major global currencies and serves as legal tender in many countries outside the US. 

The Canadian dollar (CAD) began its transition from the colonial pound to a decimalised system in the early 1850s. This was a significant step in Canada’s economic independence. 

For much of its history, the Canadian dollar was pegged to the US dollar. However, since 1970, the CAD has been a free-floating currency, its value determined by the foreign exchange market and managed by the Bank of Canada. 

The history of USD/CAD reflects the economic and geopolitical events that have shaped both countries. It’s important to note that while the US dollar is influenced by many global factors, the Canadian dollar is particularly sensitive to changes in commodity prices, and especially oil, due to Canada’s status as a significant exporter. 

Why Trade USD/CAD Currency Pair? 

USD/CAD is one of the most liquid and actively traded pairs in the forex market. This high liquidity can provide more trading opportunities and allows for easier entry and exit from trades.  

Furthermore, USD/CAD is known for its volatility, which can make it an attractive option for traders seeking increased return potential given the heightened movements in the currency’s trading price; although this could also mean increased downside risk. 

Historical Trends of USD/CAD  

2008 [2] 

Due to the global financial crisis, the Canadian dollar saw fluctuations in response to shifts in commodity prices and market sentiment. At the beginning of the year, the major was trading around 0.9888 but it rose to a high of 1.3005 by the end of the year.  

2016  

In 2016, USD/CAD saw a decrease of 15%, indicating that the US Dollar fell in value compared to the Canadian Dollar. The major hit a high of 1.4689 in January, with the low in May at 1.2460. 

2022 [3,4] 

In 2022, USD/CAD increased by nearly 13% from the low to the high, meaning the US Dollar increased in value compared to the Canadian Dollar. The low came in April when the major touched 1.2403. The major then rose through the year to a peak of 1.3977 in October 2022. 

USD/CAD Prediction  

Chart 1: USD CAD performance over the past year

According to the investment bank, ING, USD/CAD is expected to remain relatively stable over the next three months or so, fluctuating between 1.36 and 1.38, before dropping to 1.32 in 12 months’ time. 

These predictions are based on multiple factors such as economic growth, interest rates, and geopolitical events. It’s important to note that currency predictions are inherently uncertain and actual rates may vary. 

What moves the USD/CAD exchange rate? 

1. Interest Rates 

Divergence in interest rates between the US Federal Reserve (Fed) and the Bank of Canada can have a significant impact on USD/CAD. 

When the Fed raises interest rates, it generally strengthens the US dollar relative to other currencies, including the Canadian dollar. Conversely, when the Bank of Canada raises interest rates, it can lead to an appreciation of the Canadian dollar against the US dollar.  

Traders closely monitor central bank meetings and statements for indications of future monetary policy decisions, as they can influence the direction of USD/CAD. 

2. Economic Data 

Economic data releases play a crucial role in shaping market sentiment and investor expectations, which in turn impact USD/CAD.  

Key economic indicators such as GDP, employment and inflation data, and trade balances provide insight into the health and performance of both the US and Canadian economies. 

Positive economic data releases in one country relative to the other can lead to currency appreciation, while negative data can result in currency depreciation. However, the impact may vary depending on the magnitude of the data deviation compared to expectations and other contextual factors. 

3. Commodity Prices 

Canada’s reliance on commodities, especially oil, makes the Canadian dollar sensitive to changes in commodity prices.  

Fluctuations in oil prices can have a direct impact on Canada’s terms of trade and export revenues, influencing the value of the Canadian dollar and, consequently, USD/CAD. 

Traders monitor trends in commodity prices, particularly oil, as they can provide valuable insights into future movements in the currency major. Understanding the intricate relationship between oil prices and USD/CAD is crucial for informed decision-making. The relationship between oil and the major will be explained further below.   

4. Geopolitical Events 

Geopolitical events, such as political stability, trade agreements, and global events, can impact investor sentiment and currency flows, thereby influencing USD/CAD. Political instability, trade tensions, and geopolitical conflicts can lead to uncertainty in the market, causing investors to seek safe-haven currencies like the US dollar. That might impact the value of the Canadian dollar relative to the US dollar, as the CAD has historically been a risk-on, cyclical currency which is influenced by global sentiment.  

This means traders should keep abreast of geopolitical developments and news headlines as they could impact price action on USD/CAD. 

USD CAD Correlations [5] 

Positive Correlations  

USD/NOK  

USD/NOK is positively correlated with USD/CAD. This is because Canada and Norway are significant oil-producing countries. When oil prices rise, the revenues of oil-exporting countries increase, which can strengthen their currencies. 

Negative Correlations 

NZD/USD 

The NZD/USD pair has a negative correlation to USD/CAD. This is because the New Zealand dollar (NZD) and the Canadian dollar (CAD) are both commodity currencies, meaning their value is closely tied to commodity prices.  

When commodity prices rise, both the NZD and the CAD may strengthen against the US dollar (USD), leading to a negative correlation between NZD/USD and USD CAD pairs. 

AUD/USD 

AUD/USD has a negative correlation to USD/CAD. This is because the Australian dollar (AUD) and the Canadian dollar (CAD) are both commodity currencies, meaning their value is closely tied to commodity prices.  

When commodity prices rise, both the AUD and the CAD may strengthen against the US dollar (USD), leading to a negative correlation between AUD/USD and USD/CAD. 

How Does Oil Affect USD/CAD? [6] 

USD/CAD is significantly influenced by oil prices due to Canada’s status as a major oil exporter. In 2019, Canada was the fifth-largest producer and exporter of crude oil in the world.  
 
Crude oil is priced in US dollars so movements in its price have a significant impact on the flow of US dollars into the Canadian economy.  
 
When oil prices are high, the amount of US dollars Canada earns on each barrel of oil it exports will be high. Therefore, the supply of US dollars flowing into Canada will be high relative to the supply of Canadian dollars, resulting in an increase in the value of the Canadian dollar.  

Conversely, when the price of oil is low, the supply of US dollars will be low relative to that of the Canadian dollar, resulting in a decrease in the value of the Canadian dollar.  

This means oil is strongly negatively correlated with USD/CAD. If oil prices rise, USD/CAD falls, while when crude prices fall, the major rises.  

How to Trade USD/CAD 

In this section, we will delve into ways you can trade USD/CAD, providing you with a comprehensive guide to navigate this popular forex pair. 

Trade USD/CAD Using Fundamental Analysis 

Fundamental analysis involves assessing the intrinsic value of financial assets such as USD/CAD by examining a range of economic, financial, and qualitative factors that influence their value. 

1. Macroeconomic Indicators 
Economic data from both the United States and Canada play a significant role in shaping USD/CAD prices. Key indicators include GDP growth, employment figures, inflation rates, interest rates, and trade balances. Positive economic data in one country relative to the other can lead to a strengthening in its currency and impact USD/CAD. 
 

2. Monetary Policies 
The interest rates of the Bank of Canada and the Federal Reserve (Fed) can greatly affect the currency major. When the Fed tightens policy and increases interest rates, the US dollar will invariably become stronger. That means the value of USD/CAD will increase because it will take more Canadian dollars to purchase the stronger US dollar. 
 

3. Oil Price Movements 
Canada is a major exporter of crude oil, and fluctuations in oil prices can have a significant impact on the Canadian economy and the value of the Canadian dollar.  
 
For example: 
 
Rise in Oil Prices: When oil prices increase, it can boost Canada’s export revenues, improve its terms of trade, and strengthen the Canadian dollar. As a result, USD/CAD may decline as the Canadian dollar appreciates against the US dollar. 
 
Decline in Oil Prices: Conversely, if oil prices fall, it can negatively impact Canada’s economy, leading to a decrease in export revenues and a potential depreciation of the Canadian dollar. In such cases, USD/CAD may rise as the US dollar strengthens relative to the Canadian dollar. 

Trade USD/CAD Using Technical Analysis 

Technical analysis uses historical price data and market activity to forecast future price movements. It relies primarily on charts, patterns, and statistical indicators to identify trends, support and resistance levels, and trading opportunities. 

Candlestick Patterns 
Candlestick patterns provide insights into market sentiment and potential trend reversals. For example, a “bullish engulfing” pattern occurs when a large bullish candlestick engulfs the previous day’s candlestick, indicating a potential reversal from a downtrend to an uptrend. 

Check out our guide to candlestick patterns here

Moving Averages 
Moving averages smooth out price data to identify trends over a specified period. Traders often use two moving averages, such as the 50-day and 200-day moving averages, to identify trend direction and potential entry or exit points. When the shorter-term moving average (e.g., 50-day) rises above the longer-term moving average (e.g., 200-day), it may signal a bullish trend, known as a “golden cross.” 

Technical Analysis Indicators 

Relative Strength Index (RSI) 

The RSI measures the magnitude of recent price changes to determine overbought or oversold conditions. A high RSI value (above 70) indicates overbought conditions, suggesting a potential reversal or correction, while a low RSI value (below 30) indicates oversold conditions, potentially signalling a buying opportunity. 

Moving Average Convergence Divergence (MACD) 
The MACD is a trend-following momentum indicator that shows the relationship between two moving averages of an asset’s price. Traders look for bullish or bearish signals when the MACD line crosses above or below the signal line, respectively. 

Bollinger Bands 
Bollinger Bands consist of a moving average (typically a 20-day simple moving average) and two standard deviations plotted above and below the moving average. Bollinger Bands expand and contract based on market volatility. Traders use Bollinger Bands to identify overbought or oversold conditions and potential trend reversals. 
 
Fibonacci Retracement Levels 
Fibonacci retracement levels are horizontal lines drawn on a price chart to identify potential support and resistance levels based on Fibonacci ratios. Traders use Fibonacci retracement levels to identify potential entry or exit points during a trend.  

Risk Management 

Effective risk management is essential when trading USD/CAD due to its volatility and susceptibility to external factors like commodity price fluctuations, monetary policy decisions, and geopolitical tensions. Traders must employ strategies such as setting stop-loss orders, managing leverage cautiously, and diversifying portfolios to protect capital and navigate market challenges successfully. 

USD/CAD Trading Strategies 

When trading USD/CAD, there are a variety of forex trading strategies that can help you capitalise on fluctuations in the exchange rate between the US dollar (USD) and the Canadian dollar (CAD). 

 What it means to short USD/CAD 

Short selling USD/CAD involves selling the currency pair, expecting the USD to weaken against the CAD.  

In this scenario, the trader would sell USD, anticipating its value to decline. If the USD does indeed depreciate compared to the CAD, the trader can buy back the USD at a lower price, earning a profit from the price difference. 

Learn more about shorting forex pairs in our article here. 

What it means to long USD/CAD 

Going long on USD/CAD means that a trader believes the USD will strengthen against the CAD. 
 
In this case, the trader would buy USD, expecting its value to increase. If the USD appreciates relative to the CAD, the trader can then sell the USD at a higher price and profit from the difference. 

Day Trading 

Day trading involves buying and selling the currency pair within the same trading day, with all positions closed before the market closes. Day traders aim to profit from small price movements and fluctuations in the market, leveraging technical analysis, chart patterns, and intraday momentum to make quick trading decisions. 

Position Trading 

The goal of position trading is to hold onto trading positions for an extended period, typically weeks, months, or even years. Position traders aim to capture larger price movements and trends in the market. 

Swing Trading  

Swing trading involves capturing short-to-medium-term price movements or “swings” in the market. Swing traders typically hold positions for several days to weeks, aiming to profit from both upward and downward price swings.  

Sentiment Trading 

Sentiment trading is a strategy that involves analysing market sentiment and investor psychology to make trading decisions. Sentiment traders believe that market sentiment, such as optimism or pessimism, can influence asset prices.  

News Trading 

News trading focuses on the impact of news events and economic releases on financial markets. News traders aim to capitalise on market volatility and price movements triggered by significant news announcements, such as economic data releases, central bank decisions or geopolitical events. 

Best Time to Trade USD/CAD [7] 

The forex market operates 24 hours a day, 5 days a week, with various markets across different time zones, including London and Tokyo. Traders from all over the world can benefit from forex trading hours as there is always a market open.  

For USD/CAD, the most volatile periods for trading are during the overlapping sessions when both the London and New York are open or at the end of American session. 

1. London – New York Overlap (12 PM to 4 PM GMT) 

During this period, the London market session overlaps with the opening of the New York session. Volatility is high, making it an optimal time for trading USD/CAD. Significant economic data releases from both the US and Canada often occur during this overlap, impacting the pair’s price action. 

2. End of American (New York) Session (8 PM to 10 PM GMT) 

Trading of USD/CAD is active during this time. Investors often pay attention to closing prices in different asset classes when making their trades around the market close. 

Final Thoughts 

In conclusion, trading USD/CAD offers a dynamic and potentially lucrative opportunity within the forex market. With its status as one of the most actively traded pairs, individuals engaging in USD/CAD trading navigate a landscape influenced by various factors, from economic data releases to geopolitical events and commodity prices, particularly oil. 

Trading USD/CAD with Tight Spreads at Vantage via CFDs 

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Not quite ready to dive in? Practice trading risk-free with our free demo trading account.  

Get started on your USD/CAD trades via CFDs today! 

FAQs for USD CAD Trading 

What is the Spread on USD/CAD at Vantage via CFDs? 

At Vantage, the spread on CAD/USD is competitively low. Traders can enjoy spreads starting from under 1 pip during high-liquidity periods. For RAW accounts, spreads start at 0.0 pip, and for Standard accounts, they start at 1.0 pip.    

When is the Best Time to Trade USD/CAD? 

The best time to trade the major is typically during the overlap of the London and New York sessions, as well as towards the end of the American (New York) session. 

During these periods, traders can capitalise on accessing multiple markets simultaneously and have ample time to analyse and react to significant economic data releases. 

Is USD/CAD a Good Pair to Trade? 

Due to its high liquidity and volatility, USD/CAD presents favourable trading opportunities for many traders. It often reacts swiftly to economic data and central bank policies, offering numerous trading opportunities. 

Is USD/CAD a Slow Moving Pair? 

While USD/CAD is not considered one of the most volatile currency pairs, it is not necessarily categorised as a slow-moving pair. The volatility of USD/CAD can vary depending on various factors such as economic data releases, geopolitical events, and changes in commodity prices, particularly oil.  

Generally, USD/CAD tends to exhibit moderate volatility compared to some other currency pairs like GBP/JPY. 

References

  1. “The Canadian Dollar: What Every Forex Trader Needs To Know – Investopedia”. https://www.investopedia.com/articles/forex/11/cad-dollar-what-fx-traders-should-know.asp. Accessed 16 April 2024.
  2. “USD to CAD Historical Chart 2008 – ExchangeRates.org”. https://exchangerates.org/usd/cad/in-2008. Accessed 16 April 2024.
  3. “US Dollar (USD) To Canadian Dollar (CAD) Exchange Rate History for 2010 – ExchangeRates.org”. https://www.exchange-rates.org/exchange-rate-history/usd-cad-2010. Accessed 16 April.
  4. “US Dollar to Canadian Dollar Spot Exchange Rates for 2010 – ExchangeRates.org.uk”. https://www.exchangerates.org.uk/USD-CAD-spot-exchange-rates-history-2010.html. Accessed 16 April 2024.
  5. “US Dollar (USD) To Canadian Dollar (CAD) Exchange Rate History for 2022 – ExchangeRates.org”. https://www.exchange-rates.org/exchange-rate-history/usd-cad-2022. Accessed 16 April 2024.
  6. “US Dollar (USD) To Canadian Dollar (CAD) Exchange Rate History for 2022 – ExchangeRates.org”. https://www.exchange-rates.org/exchange-rate-history/usd-cad-2022. Accessed 16 April 2024.
  7. “Canadian Dollar Outlook: USD/CAD Blasts Through Resistance & Sets New 2022 High – DailyFX”. https://www.dailyfx.com/forex/market_alert/2022/03/08/Canadian-Dollar-Outlook-USD-CAD-Blasts-Through-Resistance-Sets-New-2022-High.html. Accessed 16 April 2024.
  8. “USD CAD Forecast for 2024, 2025-2026 and Beyond – LiteFinance”. https://www.litefinance.org/blog/analysts-opinions/usd-cad-price-prediction/#h0. Accessed 16 April 2024.
  9. “Using Currency Correlations to Your Advantage – Investopedia”. https://www.investopedia.com/trading/using-currency-correlations-advantage/. Accessed 16 April 2024.
  10. “Understanding the Correlation Between Oil and Currency – Investopedia”. https://www.investopedia.com/articles/forex/092415/oil-currencies-understanding-their-correlation.asp. Accessed 16 April 2024.
  11. “USDCAD Top Correlation – MyFXBook”. https://www.myfxbook.com/forex-market/correlation/USDCAD. Accessed 16 April 2024.
  12. “How & Why Oil Impacts The Canadian Dollar – Investopedia”. https://www.investopedia.com/articles/investing/021315/how-why-oil-impacts-canadian-dollar-cad.asp. Accessed 16 April 2024.
  13. “What Are The Best Trading Hours For USD/CAD? – Traders Union”. https://tradersunion.com/interesting-articles/the-best-time-to-trade-forex/time-to-trade-usd-cad/. Accessed 16 April 2024.
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