US Dollar vs Canadian Dollar (USD/CAD)

The USD/CAD currency pair indicates the exchange rate between the U.S. dollar and the Canadian dollar, or the amount of Canadian dollars (the quote currency) required to purchase one U.S. dollar (the base currency). As the pair involves the U.S. dollar, it is a major currency pair and, as such, benefits from high daily volumes, high liquidity, and tight spreads. It is also known as the "Loonie," the moniker of the Canadian dollar coin.

Most central banks and investment institutions hold the US dollar, which also serves as the official currency of exchange in several nations, such as the Commonwealth of Puerto Rico and the Republic of Zimbabwe. It is also the most widely used currency in the world.

The USD is the currency of choice for international transactions and reserves due to the stability and dependability of the U.S. economy. Moreover, the US dollar's dominance in international trade has significant implications for exchange rates and economic policies around the globe, and it can serve as a benchmark for nations that choose to set or peg their currencies to the USD’s value.

The Canadian dollar is also widely used in international transactions. Despite not having the same level of global dominance as the U.S. dollar, the CAD is still regarded as a stable and dependable currency.

The Canadian dollar saw a rapid appreciation against the US dollar from 2000 until 2008, driven primarily by booming commodity prices and a steadily growing economy. The global financial crisis of 2008 ended the rally, and the Canadian dollar has been struggling to recover ever since. The decline in oil prices during the Great Recession and again between 2014 and 2020 kept the currency under pressure.

The USD exchange rate is significantly influenced by the monetary policies of the US Federal Reserve and the Bank of Canada (BoC). The difference in interest rates between the two nations may attract foreign investors, resulting in capital flows and influencing the currency pair. For instance, if the Federal Reserve raises interest rates while the Bank of Canada maintains rates at their current level, this could attract foreign investors pursuing higher returns in the United States, resulting in a stronger US dollar and a weaker Canadian dollar. Changes in monetary policy can also influence investor sentiment and market expectations, thereby further influencing the exchange rate between two currencies.

The trade balance between the two regions is also a factor affecting the relative value of the currencies. A trade surplus in one region can cause the currency to appreciate, whereas a trade deficit can cause the currency to depreciate. The United States and Canada have a special interest in this relationship as the neighbouring countries have a robust trading relationship with a substantial quantity of goods and services exchanging hands. Consequently, any changes in their trade balance can have a significant effect on the exchange rate between their currencies.

Keep in mind that commodity prices have a big impact on the strength of the Canadian dollar. Canada is a significant supplier of basic materials and minerals, such as crude oil, natural gas, gold, and wood; consequently, the Canadian dollar is often referred to as a commodity currency.

Traders in USD/CAD should monitor the release of economic data such as GDP growth, employment data, inflation, and the trade balances of the United States and Canada. Monitor announcements from the key influential bodies in the two countries. These include: 

• US Federal Reserve and Bank of Canada (BoC) announcements for interest rates and shifts in monetary policy
• US economic data (GDP, CPI inflation, Employment Change, manufacturing/services PMI, Consumer Sentiment)
• Statistics Canada (StatCan) for data on Trade Balance, Unemployment Rate, Consumer Price Index (CPI), and Gross Domestic Product (GDP)
• Oil-related market events (OPEC meetings, oil inventory data)