USDCAD or USD/CAD is shorthand for the pair composed of the United States Dollar and Canadian Dollar. Often it’s called trading the “loonie,” as that is a slang term for the Canadian currency. While CAD trades with other currencies, its the pairing with the dollar is the most important. The value shows how many Canadian dollars (the quote currency) are needed to buy one US dollar (the base currency).
Characteristics of the Pair
Although one of the top five most traded currencies, it is the least liquid of that select group, and as such, will sometimes have relatively little volatility, especially outside of the US trading session. Compared the the US, Canada has a relatively small economy, but each country is the other’s largest trading partner; in 2016 Canada’s GDP clocked in at $1.53 trillion, compared to the US’ $18.6 trillion.
Canada’s economy is highly developed, but still has a large component consisting of commodity and agricultural production and export. Because of the strong trade connection, Canada’s economy is often subject to the ups and downs of that of the US, but not the other way around. Conversely, the US dollar is seen as a safe haven currency, often stronger than the Canadian counterpart due to lower inflation.
The Big Players
Monetary policy for the Canadian dollar is set by the Bank of Canada (BOC), which tries to keep the inflation rate at 2%, the midpoint within a window of 1% and 3%.
On the American side, monetary policy is set by the Federal Reserve (Fed) and adheres to what is called a “dual mandate” of keeping the inflation rate low and trying to achieve structural employment. In practical terms, this means the Fed will intervene to support the economy, and not just to maintain price stability.
Like the Fed, the BOC meets once every six weeks.
What Makes the Currency Tick
As mentioned, Canada and the US trade the most with each other, and as such, trade is one of the driving forces of this currency pair. Economic data from the US can spill over to impact the Canadian dollar, especially if it relates to key exports from the north such as petroleum, cars, and aircraft.
As one of the world’s largest commodity exporters, commodity prices can also influence the Canadian dollar’s performance, since that will have an impact on the demand for the currency as exporters repatriate their profits.
While the US currency is seen as a safe haven, its Canadian counterpart is seen more as a speculative play, given Canada traditionally having higher interest rates, and Canada’s economy depending on exports. However, Canada managed to weather the subprime crisis much better than any other major developed economy, leading some analysts to rethink the classification of the currency.
You can check out Orbex’s economic calendar for a full list of economic data releases that can affect this pair, and don’t forget to have a look at the trading tips section of the website for more information on how to trade the USDCAD.