The United States dollar/Canada currency pair denotes the exchange rate between the US dollar and the Canadian dollar and expresses it as the number of Canadian dollars needed to buy one US dollar. The USD/CAD currency pair is an indirect currency pair, and it is nicknamed as Loonie.

The USD/CAD is also classified as a commodity pair, as it exhibits a correlation to the energy products crude oil and natural gas. The value of the USD/CAD is strongly tied to the trade relationship between Canada and the US. Geography promotes free trade between the two nations and they are politically cooperative with each other.

Breaking Down ‘USD/CAD’

The Canadian dollar is the world's seventh most traded currency and some central banks keep it as a reserve currency. The USD/CAD exchange rate in relation to the Greenback and other major currencies is densely influenced by crude oil prices.

This is because Canada has vast oil reserves - second only to Saudi Arabia - and is a vital producer of the commodity, with 99% of its crude oil exports shipped to the United States. As per an estimate, more than two million barrels of oil travel from Canada to its southern neighbor every day.

The price of oil, therefore, acts as a leading indicator for the movement of the USD/CAD pair. When oil prices rise, USD/CAD falls because the value of the Canadian dollar appreciates.

Besides, the general economic health of the US has a significant impact on the pair and market interventions by the Federal Reserve will affect the value of both currencies.

The strength of the Canadian economy saw the Loonie rise sharply against the greenback in September 2007, closing above the US dollar in trading for the first time in 30 years.

It went on to reach a record high of US$1.1024 in November and was named Canadian Newsmaker of the Year by Time magazine in 2007.

Currency Correlations

The Canadian dollar is highly correlated with the value of commodities, particularly the WTI crude oil. As we spoke earlier, the Canadian economy is densely reliant on crude oil and the price of oil directs the health of the economy.

In 2016, when oil prices deflated to decade-lows, trading beneath $30 a barrel, the Canadian dollar placed a record low, trading to $1.46, implying it required 1.46 Canadian dollars to buy 1 US dollar.

Besides, the USD/CAD shares a negative correlation with the AUD/USD, GBP/USD and the NZD/USD currency pairs as they are quoted in US dollars.

What Determines the USD/CAD Exchange Rate?

Several factors can impact the USD/CAD valuation, which include:

BOC & US FED Monetary Policies: The Bank of Canada and the Federal Reserve control the supply of money in the market, to keep the economy on track. A dovish policy, which is also known as the expansionary policy, weakens the currency. In contrast, a hawkish monetary policy (contractionary policy) strengthens the currency.

Economic Events: Any movement in the US and Canadian economic events determines the exchange rates. Top of the line economic events include GDP, Employment Change, Industrial Production, and Consumer Price Index. Better than forecast data increases the demand for the related currency and impacts the value of either Loonie or the US Dollar, causing fluctuations in the USD/CAD exchange rate.

Crude Oil: Typically, the price of crude oil has been highly correlated with USD/CAD. Therefore, a rise in crude oil prices increases the value of the Canadian dollar and vice versa.

Major Economic Events:

Gross Domestic Product – the Gross domestic product is the central measure of economic growth in the region.

Consumer Price Index – Since one of the goals of the BOC is to maintain price stability, they keep an eye on inflation indicators such as the CPI. If the annual CPI deviates from the central bank’s target, the BOC could make use of its monetary policy tools to keep inflation in check.

Trade Balance – The Canadian economy is considered to be a resource based economy and is heavily export dependent. Falling export numbers could lead to a decline in economic activity.

Ivey Purchasing Managers’ Index (PMI) – The PMI is a survey designed to see whether businesses are optimistic or pessimistic about the economy. A reading above the baseline 50.0 means that conditions in the business sector are growing while a reading below 50.0 indicates otherwise.

USD/CAD Specifications

The USD/CAD is traded in amounts denominated in Canadian Dollar. Standard lot Size: 100,000 Mini lot size: 10,000 One pip in decimals 0.0001 Pip Value: $10 (varies with exchange rate)

Formula

Profit/Loss = (Bid Price – Ask Price) X Contract Size X Number of Lots / Closing Price