One of the least known currency pairs by Forex traders but which has its importance however, is the USD/CAD or the US Dollar/Canadian Dollar pair. In fact, this pair of currencies has advantages both in terms of technical and fundamental analysis and because of its interesting and rapid progression. Let’s find out the particularities of this currency pair and its advantages as well as the best way to treat it on the foreign exchange market.
What Is the USD/CAD?
USD/CAD is a pair showing the exchange rate between the US dollar and the Canadian dollar. Its course therefore corresponds to the value of one US dollar in Canadian dollars. On the Forex and in the specialized forums we hear about this currency pair under the name of Loonie. The Loonie currency pair is at least an important pair on the Forex as it represents about 5% of the set of annual transactions and is therefore the sixth most treated currency pair in the world. Furthermore, USD/CAD has the particularity of presenting a high volatility that can be advantageous for short or medium term traders.
USD/CAD is generally quoted with 4 decimal places. As with most other currencies, its upward or downward evolution is mainly determined by the phenomena of supply and demand. The course of this asset is therefore what is commonly called a “floating” course. It is known that the body responsible for regulating the greenback’s price is the Fed (Federal Reserve). As for the Canadian dollar, the homologous body is the BoC (Bank of Canada). However, the interventions of these two financial institutions on the Forex to manipulate the evolution of prices are very rare. In historical terms, the USD/CAD has had a downward evolution since its creation with a record low at 0.9058 and a historical high at 1.6188 points.
Factors that Affect the USD/CAD Currency Pair
The USD/CAD is affected by factors that influence the value of the U.S. dollar and/or the Canadian dollar in relation to each other and other currencies. For this reason, the interest rate differences between the Federal Reserve (Fed) and the Bank of Canada (BoC), will affect the value of these currencies when compared to each other. When the Fed intervenes in open market activities to make the U.S. dollar stronger, for example, the value of the USD/CAD pair will increase because it will take more Canadian dollars to purchase the stronger U.S dollar. The value of the Canadian dollar is also highly correlated with the price of commodities, especially oil. Because the Canadian economy is heavily reliant on oil, the price of oil dictates the health of the economy and the currency itself. For this reason, the Canadian dollar is often labelled as a commodity currency.
Technical Analysis of the USD/CAD
Before starting to take a position on the USD/CAD currency pair, you must obviously carry out a good technical analysis of this pair, but to do so it is essential to know how this currency pair behaves depending on the different configurations of the charts. It is for this reason that we offer here a summary of the main trends that have characterized its evolution over the last ten years through a complete historical technical analysis. The first thing you notice when looking at historical USD/CAD price charts is the interesting medium-term volatility of this currency pair. Although short-term movements remain more moderate, it is therefore possible to invest in this value with a long strategy. From July 2008 to February 2009 this pair first saw an interesting uptrend that led it from 1.0235 pips to 1.2732 pips. However, this sudden and very volatile rise quickly gave way to a downward correction trend that brought the pair back to the 0.94446 pip level in April 2011. This level is the threshold lowest reached by this currency pair over the last ten years.Starting in May 2011, in fact, the USD/CAD pair starts a long bullish phase with a clearly positive underlying trend that allows it to reach its historic high at 1.3776 pip in January 2016 despite some attempts for downward correction usually due to strategic profit withdrawals. However, in February 2016 the market began to appear more hesitant and consequently a first contraction was observed at 1.2553 pips in April 2016 and then a slight recovery towards 1.3652 pip in April 2017. Following the quotation, it again evolved downwards and first reached 1.2482 pips in August 2017, before rising to 1.2896 pips in November of the same year and finally falling back to 1.2315 in January 2018. Since then tries to overcome the technical resistance of 1.25 pips.
Tips for Investing in USD/CAD
You certainly know that it is possible to deal online with the quotation of the USD/CAD currency pair using a broker’s trading platform but, before launching, it is necessary to know how to correctly analyze the elements that could have an influence on the quotation itself to more or less long term. To do so it is obviously good to follow the economic situation of the United States and Canada because they have a direct influence on this currency pair. For this purpose, it will be necessary to pay attention to the following publications and events. The oil stocks that are published every week in your broker’s economic calendar and which, as we have seen, directly affect Canada’s economic health. OPEC meetings and announcements, also in the case of oil market monitoring. In fact, these events always strongly influence the price of crude oil and therefore affect Canadian economic health.
The evolution of the main stock exchange indexes of these two countries will also have to be followed closely. As for Canada, it is very simple, given that the country has a single index, Ivey PMI, which accounts for the country’s economic health. The operation is a bit more complicated for the United States because they have different stock market indices but we advise you to limit yourself to following the Dow Jones and the NASDAQ. Finally, the interest rate changes decided by the big central banks of these two countries as well as all the communications made by these institutions will obviously have to be followed carefully. Recall that the US Federal Reserve publishes reports every six weeks and that the Bank of Canada publishes them every month. However, we draw your attention to the value to be given to some of these public statements. In certain cases, for example changes in interest rates announced in advance, decisions indicate minimum values and it is therefore preferable to rely mainly on real data and statistics.
Analyst’s forecasts must also be taken into consideration, especially with regard to oil and related stocks, which often influence the market before official publications. When the actual data are published, it is necessary to assess whether these correspond to expectations and therefore whether the market has over or underestimated the impact on the foreign exchange market. It goes without saying that these elements that allow you to carry out a good fundamental analysis of the USD/CAD price list have nothing to do with the technical analysis that must also be used to obtain reliable signals. We conclude this article by pointing out that the USD/CAD currency pair is not considered as a high volatility currency pair. We therefore advise you to favor long position-taking rather than shorter-term trading that would require a high leverage impact that you know the risks for. As we have seen before, long-term trends are much more interesting. However, nothing prevents you from also using short strategies based on Day Trading to cover long positions, remaining very attentive to all micro-movements and treating solely in the direction of the trend.
Tips for Trading The USD/CAD
As with most Forex currencies, US and Canadian dollar prices are heavily influenced by decisions made by the respective central banks regarding the monetary policy implemented. Consequently, the value of the USD/CAD may change due to a change in interest rates or asset purchase programs carried out by one or other of these banks. Volatility is then very high with a market reaction called the “announcement effect”. On an economic level, it is above all good to analyze the elements coming from the United States, given that the two countries have very tight economies and that Canada still depends heavily on the economic health of the United States. As a result, any news that has an effect on the greenback will have greater repercussions on the USD/CAD pair than on any other currency pair. Finally, one of the most important elements to take into consideration in the USD/CAD analysis is undoubtedly the price of oil. Canada is in fact one of the great oil producing countries and its economy is mainly based on the exploitation of this natural resource. In historical terms, a correlation is observed in the order of 70/80% between the value of the Canadian dollar and that of oil. When barrel prices progress upwards the CAD also tends to appreciate. Following Brent price is therefore absolutely a good choice to take a position on USD/CAD.
How to Invest in The USD/CAD?
If you are interested in the foreign exchange market in general and the USD/CAD currency pair in particular, know that you can invest in its live quotation from the market thanks to online broker trading platforms. One of the best platforms for trading USD/CAD is itbfx.com.