:max_bytes(150000):strip_icc()/shutterstock_308974151-5bfc3373c9e77c00519c2261.jpg?w=780&resize=780,470&ssl=1 "Trading the USD/CAD Currency Pair")
What Is the USD/CAD?
USD/CAD is the abbreviation for the U.S. dollar versus Canadian dollar (USD/CAD) currency pair. The quote for the USD/CAD currency pair defines how many Canadian dollars or quote currency are needed to purchase one U.S. dollar, the base currency.
Trading the USD/CAD currency pair is also known as trading the “loonie,” the name for the Canadian one-dollar coin, its namesake bird. The USD/CAD is one of the most liquid and actively traded pairs in the forex market.
Key Takeaways
- USD/CAD is the currency pair for the U.S. and Canadian Dollars.
- The USD/CAD quote tells investors how many CAD can be bought with one USD.
- Trading the USD/CAD currency pair is also known as trading the “loonie,” the name for the Canadian one-dollar coin.
Currency Pair Value
The value of the USD/CAD pair is quoted as 1 U.S. dollar per X Canadian dollars. For example, if the pair is trading at 1.20 it means that it takes 1.2 Canadian dollars to buy 1 U.S. dollar, or alternatively that 1 CAD is worth $0.833 USD.
The USD/CAD currency pair has reached parity at different points in history (i.e. 1:1). The USD/CAD currency pair is quite actively traded as there are significant business ties between the two nations.
Trading the USD/CAD provides high liquidity for investors, and the bid-ask spreads are generally more beneficial.
Factors that Affect the USD/CAD
The USD/CAD is affected by factors that influence the value of the U.S. and Canadian dollars, with each other and other currencies. For this reason, the interest rate differential between the Federal Reserve (Fed) and the Bank of Canada (BoC), will affect the value of these currencies.
When the Fed intervenes in open market activities to make the U.S. dollar stronger, the value of the USD/CAD cross 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 such as crude oil. Because the Canadian economy is heavily reliant on oil, the price of oil dictates the state of the economy and the currency itself. For this reason, the Canadian dollar is often labeled as a commodity currency.
Historical Parity
The USD/CAD pair has seen its traditional relationship hit price parity. For example, in the aftermath of the Great Recession and the subsequent quantitative easing from the U.S. Federal Reserve, the Canadian dollar soared against the U.S. dollar to trade below parity, eventually reaching 0.95. Almost all of the instances of parity have been related to periods of U.S. financial difficulty or high oil prices—sometimes both.
In 2016, however, oil prices slumped to decade-lows, trading below $30 a barrel. Consequently, the Canadian dollar hit a record low, trading at 1.46. This meant it required 1.46 Canadian dollars to buy 1 U.S. dollar. As of February 2024, the USD/CAD rate hovers at 1.35.
Which Currencies Are Considered Reserve Currencies?
CAD is one of the most-held reserve currencies after the USD, the euro (EUR), the British pound sterling (GBP), and the Japanese yen (JPY).
What Is the Difference Between Liquidity and Volatility in Forex Markets?
How active a market is, how many traders are trading, and trading volume determines its liquidity. Volatility is the measure of how drastically a market’s prices change. A market’s liquidity impacts how volatile market prices are. Lower liquidity commonly results in a more volatile market and causes prices to change drastically. Higher liquidity means a less volatile market where prices don’t radically fluctuate.
Why Is the Canadian Dollar Called a Commodity Currency?
The Canadian dollar is regarded as a commodity currency due to Canada’s natural resources and significant raw material exports.
The Bottom Line
When investors trade the USD/CAD currency pair, it is also known as trading the “loonie,” the name for the Canadian one-dollar coin. CAD is one of the most-held reserve currencies after the USD and trading the USD/CAD provides high liquidity for investors.
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