USD/CAD

Price Analysis of the US Dollar and Canadian Dollar (USD/CAD)

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One of the least known currency pairs of Forex traders but which is still important is the USD/ CAD, the parity US Dollar / Canadian Dollar. This currency cross indeed presents particularities both in terms of technical and fundamental analysis and sometimes offers high volatility. Let's find out together the peculiarities of this currency pair and how you can perform price analysis.  

Elements that can influence the price of this asset:

Analysis N°1

As with the majority of Forex currencies, the prices of American and Canadian dollars are strongly influenced by the decisions taken by their respective central banks regarding the monetary policy applied. As a result, the value of the USD/CAD can be adjusted by a modification of the interest rates or of the programs of assets repurchases carried out by one or the other of these big banks. Volatility then becomes very high with a reaction from the markets called the "announcement effect".

Analysis N°2

On an economic front, it's especially important to analyse the elements coming from the United States, since the two countries have very linked economies and Canada is still highly dependent on the American economic health. As a result, any news that impacts the “buck” will affect the USD/CAD parity more than any other currency pair.

Analysis N°3

Finally, one of the most important elements to take into account in the USD/CAD analysis is without a doubt the price of oil. In fact, Canada is one of the major oil producing countries, and its economy is mainly based on the exploitation of this natural resource. Historically, a correlation of around 70 to 80% has been observed between the value of the Canadian dollar and that of oil. When oil prices rise, the CAD tends to strengthen too. Following Brent prices is therefore very wise for taking position on the USD/CAD.

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Some basic information about USD/CAD

The USD/CAD is the parity showing the exchange rate between the US Dollar and the Canadian Dollar. Its exchange rate in clear is equivalent to the value of a US dollar in Canadian dollars. On Forex or while surfing on specialized forums, you'll hear about this currency pair under the name of Loonie.

The Loonie currency pair is still an important cross currency on Forex since it represents nearly 5% of all the transactions carried out annually. It's therefore the sixth most traded currency pair in the world. Additionally, the USD/CAD has the distinctive characteristic of exhibiting significant volatility, which can be profitable for traders in the short or medium term. 

 

How it works

Generally, the USD/CAD is quoted by a 4 decimal number. As with most other currency pairs, it's mainly the supply and demand phenomena that justify its upward or downward movement. The price of this asset is therefore what is commonly called a "floating" price.

Although the body responsible for regulating the price of the “buck” is the Fed or American Federal Reserve; as far as the Canadian dollar is concerned, it is the CAD or Canadian Central Bank. However, interventions of these two financial organizations on the Forex to manipulate the evolution of the prices remain very rare.

Historically, the USD/CAD cross has been evolving downward since its creation with a historic low at 0.9058 and a record high at 1.6188 points.

 

Technical analysis

Before starting to take position on the USD/CAD currency pair, you should of course carry out a proper technical analysis of this pair. But for that, it's essential to know how this currency cross behaves according to the different graphic configurations. That's why here, you'll find a reminder of the major trends that have marked its evolution over the past ten years through a comprehensive historical technical analysis.

To start with, the first thing you notice when looking at the historical charts of the USD/CAD price is the interesting medium-term volatility of the currency cross. While the short-term movements remain more moderate, therefore it's possible to invest in this security with a long strategy.

From July 2008 to February 2009, this cross first experienced an interesting upward trend which led it to going from 1.0235 pips to 1.2732 pips. However, this sudden and very volatile rise quickly gave way to a downward correction trend, less volatile and frank and punctuated by lots of bullish micro-movements which brought the cross down to 0.94446 pips in April 2011. This was the lowest threshold reached by this currency pair in the last 10 years.

From May 2011, the USD/CAD cross began a long bullish phase with a clearly positive underlying trend which allowed it to reach its historic high this time at 1.3976 pips in January 2016 despite some downward correction attempts most often due to strategic profit taking.

However, in February 2016, the market began to be more hesitant. A first economic contraction to 1.2553 pips was observed in April 2016, then a slight recovery towards 1.3652 pips in April 2017.

Since then, the price has again evolved downward and first reached the 1.2482 pips in August 2017 before recovering to 1.2896 pips in November of the same year and then relapsing to 1.2315 pips in January 2018. Since then, it has been trying to reconnect with the technical resistance of 1.25 pips.

 

Advice

As you're aware, it's possible to trade the price of the USD/CAD currency pair online from a broker's trading platform.  But before you start, it's important to know how to correctly analyse the elements likely to have an impact on its exchange rate in the more or less long term.

Of course, it's a good idea to follow the economic situation of the United States and Canada which has a direct impact on this currency pair. To do so, you should pay attention to the following publications and events:

The oil stocks that are published every week in your broker's economic calendar and that affect the economic health of Canada.

OPEC meetings and announcements, also with the view of monitoring the oil market. These events still strongly influence the price of crude oil and therefore have an impact on Canadian economic health.

You should also closely follow the developments in the main stock market indices of these two countries. For Canada, nothing could be simpler since the country has only one index, the Ivey PMI, which reports on the country's economic health. The task is a little more complicated for the United States, which has several stock market indices, but we suggest you follow the Dow Jones and the NASDAQ.

Finally, keep a close eye on the interest rate changes decided by the major central banks of the two countries as well as on all communications from the organizations. Remember that the American Federal Reserve publishes reports every six weeks and that the Central Bank of Canada publishes its reports every month.

You should also pay attention to the value to be given to certain public statements. Certain decisions are minimized like certain changes in interest rates announced in advance so it's preferable to rely mainly on actual figures and statistics. You should also take into account analysts' forecasts, particularly those concerning oil and its stocks, which often influence the market before official publications. Once the actual figures have been published, you'll need to assess whether they are in line with expectations in order to assess whether the market has overvalued or on the contrary undervalued the impact on the foreign exchange market.

It goes without saying that these elements will allow you to carry out a good fundamental analysis of the USD/CAD price but do not concern the technical analysis. It is however necessary to use this type of analysis to obtain reliable signals.

We'll end this article by reminding you that the USD/CAD currency pair is not considered as a high liquidity currency pair. As a result, many traders favor taking long positions rather than very short-term trading which would require significant leverage, the risks of which you probably already know. Long-term trends are therefore often preferred by investors.

However, nothing prevents you from also using short strategies based on Day Trading to cover your long positions, while making sure you remain highly attentive to any and all micro-movements and to trade only in the direction of the trend.

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