USDCAD Trading Guide: How to Trade the USD/CAD

The USDCAD currency pair takes centre stage as the most traded currency pair involving the Canadian dollar. In addition to the market stability experienced as a result of robust economic ties between the US and Canada, the influence of global commodity prices also introduces an element of volatility, which may appeal to traders seeking observable trends alongside calculated risks.

Main Points:

• The USDCAD currency pairing, also known as the Loonie, is made up of the US dollar as the quote currency and the Canadian dollar as the base currency.


• USDCAD is the 5th most traded currency pair in the forex market with a trading volume of 5.2% as of March 2024.


• The USD/CAD currency pair is notable for its inverse correlation with oil prices.


• Important factors driving the USDCAD exchange rate are commodity prices, central bank policies and important economic data releases.

Understanding the US Dollar - Canadian Dollar Currency Pair

The US and Canada boast robust top economic rankings among leading countries. Their currencies, USD and CAD, also play major roles in international finance.
Canada stands out as the US's biggest trading partner, with an annual trade value exceeding $356 billion (as of 2024).

Understanding the exchange rate between these two currencies, where USD serves as the quote currency and CAD as the base currency, is crucial for navigating this significant trade flow.

What Is the US Dollar?

• The United States dollar (symbol: $) abbreviated as ‘USD’ is the official currency of the USA.
• It is often called the greenback or buck.
• It is considered the world's most stable currency.
• It is used as a benchmark currency for global transactions, making it the most used currency in the world.
• It is the most reserved currency of foreign central banks.

What Is the Canadian dollar?

• The Canadian dollar (C$) abbreviated as ‘CAD’ is Canada’s official currency.
• It is used for everyday domestic transactions in Canada.
• The Canadian dollar is nicknamed “Loonie” because of the loon bird image inscribed on the back of the Canadian one-dollar coin (C$1).
• It is referred to as a "commodity" currency because the economy of Canada depends largely on commodity exports.

History of the USDCAD (US Dollar and Canadian Dollar)

The journey of the US dollar began with the Coinage Act of 1792, which designated it as the official currency of the United States. Today, it stands as the world's most widely used currency, facilitating everyday transactions and serving as a key component of foreign reserves held by countries worldwide.

The Canadian dollar was introduced in the early 1850s, replacing the colonial pound. In 1871, the Uniform Currency Act solidified its dominance by unifying various provincial currencies under the single banner of the Canadian dollar (CAD). Throughout its history, it has changed between being pegged to the US dollar or Gold or being permitted to float freely. Initially, it was pegged to the gold standard between 1854 and 1914, then allowed to float freely from 1950 to 1962. A period of depreciation in the 1950s led to a brief return to a fixed exchange rate system in 1962 as part of the Bretton Woods Agreement. Finally, with the collapse of the Bretton Woods system, the CAD joined other major currencies in freely floating on the international market.

What Is USD/CAD Trading?

USD/CAD trading involves capitalising on currency fluctuations between the US dollar and the Canadian dollar.

The USD/CAD exchange rate simplifies the USD to CAD currency conversion. It is the most current price at which the CAD is required to obtain 1 USD. For instance, if the USD/CAD exchange rate is quoted at 1.30, it will require 1.30 CAD to purchase 1.00 USD. If the USD strengthens against the CAD to an exchange rate of 1.40, it will require 1.40 CAD to purchase 1.00 USD. Conversely, if the USD/CAD exchange rate declines to 1.20, it will require 1.20 CAD to purchase 1.00 USD.

Furthermore, if the USDCAD exchange rate declines below parity (1.0), it means the US dollar is generally weaker than the Canadian dollar. Conversely, if the USDCAD exchange rate rises above parity (1.0), it means the US dollar is generally stronger than the Canadian dollar.

The US dollar has experienced instances of depreciation below parity (less than 1.0) against the CAD on multiple occasions, typically coinciding with financial crises in the United States or escalations in energy prices.

What Are the Driving Factors Affecting the USD/CAD Exchange Rates?

Various fundamental factors influence the supply and demand of the US dollar and the Canadian dollar, impacting the fluctuations in its exchange rate. They include:

Commodity Prices

Canada's significant role in the production of petroleum, minerals, wood products, and grains has led to the classification of its currency as a commodity currency.
Given the dependence of the Canadian economy on oil, the value of the Canadian dollar is closely tied to crude oil prices. As a result, changes in oil prices have a direct influence on both the economy and the currency.

An increment in oil prices sees the earnings of Canadian exporters rise in US dollars. This increased inflow of USD strengthens the Canadian dollar, leading to a bearish USD/CAD exchange rate. Conversely, a slump in oil demand and energy prices weakens the Canadian dollar. As a result, less USD flows into Canada, making the USD/CAD pair more attractive to buyers seeking a stronger USD relative to a weaker CAD. An example of this scenario is the 2020 oil price collapse, as the Canadian dollar depreciated against various currencies.

Interest Rate Differential

The interest rate gap between the US Federal Reserve and the Bank of Canada (BoC) is a primary factor that influences the direction of the USD/CAD exchange rate. For instance, when the Fed takes measures to strengthen the US dollar through open market interventions, the USD/CAD exchange rate tends to rise as it requires more Canadian dollars to buy the stronger US dollar. Conversely, an interest rate hike from the Bank of Canada (BoC) may drive up demand for CAD and strengthen it against the US dollar, thus weakening the USD/CAD exchange rate.

Economic Indicators

Major economic data reports can exert immediate influence on the USDCAD exchange rate, shaping its trajectory in the forex market. They include:

1. Consumer Price Index (CPI):
   Inflation control is a top priority for the Bank of Canada and the Fed Reserve. They rely heavily on their Consumer Price Index (CPI) report to make changes in monetary policies. Hence, it is a vital tool for currency traders to discern the direction of the USDCAD pair.


2. Gross Domestic Product (GDP):
   This is the single most comprehensive measure of the country's economic activity. A positive GDP indicates economic growth and a negative GDP indicates economic contraction.


3. Trade Balance:
   Much like other economies reliant on commodities, the USDCAD has a close relationship to shifts in its export and import trade volumes.

Other major economic data influencing the USDCAD exchange rate include Non-farm Payrolls (NFPs), Producer Price Index, ISM Manufacturing & Non-manufacturing data, Canada’s Ivey Purchasing Managers’ Index (PMI), Retail Sales, Unemployment Rate etc.

Why Is USDCAD an Important Forex Pair?

1. Economic Standing: The US dollar and Canadian dollar are currencies of two of the largest economies in the world.


2. Trading Volume: The US dollar is the most traded currency in the world, while the Canadian dollar is the 6th most traded currency in the world. Their currency pair (USDCAD) is the 5th most traded currency pair in the forex market with a trading volume of 5.2% as of March 2024.


3. Reserve Currency: The US dollar is the main reserve currency, while the Canadian dollar has climbed the ranks and now holds the number six spot amongst the reserved currencies held by central banks worldwide.


4. Spread: As a result of high trading volume and liquidity, the USDCAD pair experiences minimal spread between its bid and ask price.

How to Trade the USDCAD?

USD/CAD trading through Contracts for Difference (CFDs) provides an alternative to conventional methods of trading the US dollar for the Canadian dollar or vice versa.
CFDs allow you to speculate on the exchange rate's fluctuations without owning the underlying assets. By placing long or short positions on USDCAD CFDs, you have the potential to make profit or losses from the price difference between the entry and exit prices of your trade.

What Are the Trading Hours for USDCAD CFDs?

Understanding the USDCAD market hours is crucial for traders looking to capitalise on its price fluctuations throughout the day. Unlike stock exchanges with limited trading hours, the USD/CAD CFD market offers continuous operation. This translates to a 24/7 availability to buy and sell USD/CAD whenever market conditions align with your trading strategy. Regardless of your location, you can track price fluctuations in real time and trade the USDCAD CFDs directly from the Plus500 WebTrader platform. USDCAD trading is available continuously, starting Sunday at 10:00 PM CET all the way to Friday at 10:00 PM CET.

*Please note that trading platform hours depend on the individual operator.

Key Concepts for Trading USDCAD CFDs

An understanding of these fundamental concepts is crucial for adept risk management while engaging in USDCAD trading.

1. Contract Size: This is the amount of base currency you control in a USD/CAD trade.
• A standard contract size is equal to 100,000 units of the base currency. For instance, when trading the USD/CAD currency pair with a standard contract size, you are trading $100,000 worth of US dollars.
• A mini contract size equates to 10,000 units of the base currency.
• A micro contract size equates to 1,000 units of the base currency.


2. Margin: This is the measure of the amount of contract size you can control beyond what your initial deposit would normally allow. With 30:1 leverage, you can use a $3333 balance to control a $100,000 position in a USD/CAD trade.
   
   

   By using leverage to trade larger contract sizes, you amplify the minor fluctuations of exchange rates and increase both the potential for gains as well as losses.

3. Spread: This is the difference between the USDCAD current buy rate (bid price) and the current sell rate (ask price). It is one of the costs of executing a USDCAD buy or sell trade.


4. Pip: A pip is the smallest price move of an exchange rate, which is typically 0.0001 for the USDCAD pair. The value of a pip move is denominated in the quote currency (Canadian dollars). For example,
   
   • When trading with a standard contract size, each pip movement equals 10 CAD.
   • When trading with a mini contract size, each pip movement equals 1 CAD.
   • When trading with a micro contract size, each pip movement equals 0.1 CAD.
   
   

   To calculate the value in USD:
   Suppose you're operating with a standard contract size and the current exchange rate of USD/CAD stands at 1.100. To determine the value of a one-pip movement, you would divide the CAD value of a standard contract size by the current exchange rate:

   
   10 CAD / 1.100 (exchange rate) = 9.09 USD (approximately).

5. Swap (Overnight Funding Fee): This represents the expense incurred on your USD/CAD trade when you roll over positions to subsequent trading days. These charges are accrued daily on your open positions until they are eventually closed. As of April 2024, the overnight funding for USDCAD is -0.0070% for short positions and -0.0044% for long positions.

Steps to Buy and Sell USDCAD CFDs With Plus500

To trade USDCAD CFDs, follow these steps:

• Open a real or demo trading account to get started.
• Log in to the Plus500 app or WebTrader platform.
• On the platform, locate and choose ‘USDCAD’ from the instruments list category or by using the search bar.
• Conduct a thorough analysis of the USDCAD price and determine whether to buy (long) or sell (short).
• Specify your risk management parameters, including Take Profit (Close at profit) and Stop Loss (Close at loss).
• Finally, confirm your trade by clicking the "Buy" or “Sell” button located at the bottom of the order window.

Trading USDCAD CFDs with Pending Orders

Plus500 also allows you to place trades using different order types. With such flexibility, you can tailor your trading strategy to suit different market conditions.

To execute a trade for USDCAD CFD at a specific level above or below its current price, you can utilize a pending order. You can follow these steps to set a pending order:

• Click on "advanced" within the order window.
• Toggle the option "buy when rate is" to establish your pending buy order, specifying the desired price above or below the market rate.
• Toggle the option "sell when the rate is" to set your pending sell order, indicating the preferred price above or below the market rate.
• Finally, click "Place Order" to confirm and execute the pending trade.

Conclusion

This guide provides the foundation for trading the USDCAD currency pair including details on contract sizes, margins, spreads, pips, swaps, and steps to place trades.
USDCAD is the 5th most traded forex pair characterised by high liquidity, volatility, and tight spreads. Factors affecting its exchange rate are commodity prices (especially oil), interest rate differentials, economic data releases, etc. You can speculate on the exchange rate movements of USDCAD by trading Contracts for Difference (CFDs) using various order types available on the Plus500 app or web trader platform.

Frequently Asked Questions

What Are the USDCAD Peak Trading Hours?

USDCAD experiences significant volatility in price movements during the market session overlap of London and New York, which occurs from 12:00 PM to 16:00 PM GMT when almost all of the high-impact news from the US and Canada is released.

What Trading Strategies Are Used to Trade USDCAD?

Some USDCAD trading strategies are day trading and swing trading. This may involve utilising trendlines to identify trends, identifying support and resistance levels and breakout trading.

What are the characteristics of USD/CAD price movement?

The USD/CAD price movement is known for its tendency to consolidate for a period of time before making rapid price expansions.