The USD/CAD pair is the exchange rate between the United States dollar and the Canadian dollar. It’s expressed as the number of Canadian dollars (the quote currency) needed to buy one U.S. dollar (the base currency). It’s nicknamed the “loonie” after the loon bird found on a Canadian dollar.USD/CAD is classified as a commodity pair, as it exhibits a correlation to energy products like crude oil and natural gas, and metals, of which Canada is a large producer. The value of USD/CAD is also strongly tied to the trade relationship between Canada and the U.S, which has had a free trade agreement since 1987.

Breaking Down ‘USD/CAD’

The Canadian dollar is currently the sixth most traded currency in the world, with USD/CAD accounting for over 5% of forex trading volume. The pair is primarily driven by crude oil prices, as the Canadian economy relies heavily on oil production, being the world's fourth largest exporter of crude oil. Canada has vast oil reserves, second only to Saudi Arabia, and is a key oil exporter to the United States, accounting for 56% of all crude oil imports into the U.S. As an estimate, 3.8m barrels a day cross the border.The price of crude oil acts as a leading indicator for where USD/CAD is likely to head. When oil prices rise, USD/CAD falls because the value of the Canadian dollar appreciates. However, this isn’t the only factor that influences the price. The strength of the respective country's economy and interest rates can also increase demand for either currency.

What Determines the USD/CAD Exchange Rate?

There are two main factors that determine the USD/CAD exchange rate: Bank of Canada and U.S. Federal Reserve Monetary Policy: The Bank of Canada and Federal Reserve control the supply of money in the market to keep the economy on track. A dovish policy, also known as expansionary policy, weakens the currency as the monetary supply increases. In contrast, a hawkish monetary policy (contractionary policy) strengthens the currency as central banks increase interest rates, contracting the monetary supply.

Oil Prices:

As mentioned, crude oil is a massive part of the Canadian economy. But it’s also vital to the American economy, meaning that rising oil prices are bad for the U.S. economy and good for the Canadian economy.Higher oil prices also mean that Canada earns more for its oil, as American dollars flow out of the U.S. and into Canada, which further increases the value of the Canadian dollar.

Other USD/CAD Price Factors

These aren’t the only factors, however. There are others, such as:

Economic Events:

Any movement in the U.S. and Canadian economic events determines the exchange rates. Top-of-the-line economic events include:Better than forecast data increases the demand for the related currency and impacts the value of either the Australian dollar or the U.S. Dollar, causing fluctuations in the AUD/USD exchange rate as investors rush in to buy either currency.As the U.S. is the leading export market for Canada by far, accounting for 80% of all Canadian exports, data relating to U.S. consumption and economic health is of particular importance to the pair. High unemployment in the U.S., for example, will indicate that consumption is likely to drop in the near future, and therefore demand for oil will drop.

U.S.-Canada relations

Because of Canada’s reliance on the U.S., changes in the relationship between the two can have a significant effect on the price of USD/CAD. For example, when Donald Trump imposed tariffs on Canadian metal imports in 2018, the Canadian dollar weakened as uncertainty around the trade agreement's future grew.

Other commodity prices

While crude oil is Canada’s biggest commodity export by far, it is also a large producer of gold, wheat, and aluminum. When the prices of these assets fall, less profit is made from commodity exports, hurting the export market and the Canadian dollar.

Market sentiment

Because Canada produces many natural resources, its economy is effectively at the beginning of the global supply chain. When global outlook is poor, this can be especially devastating for CAD as it indicates overall consumption will worsen, leading to a decline in exports for this trade-focused economy.

Correlations

As mentioned, CAD is particularly influenced by the price of oil, but there are other currency correlations to be aware of. For example, other “petro-currencies”, such as the Norweigan Krone or Russian Ruble hold tight correlations with the Canadian dollar. A fall in either of these currencies might have an impact on the Canadian dollar, as traders are aware of this link and expect CAD to fall too. USD/CAD is also negatively correlated to pairs where USD is the quote currency, such as GBP/USD, AUD/USD, and NZD/USD.

USD/CAD Recent Events

Oil fluctuations

As a consequence of the Coronavirus pandemic, oil prices plummeted as demand contracted heavily. This caused a significant weakening in the Canadian dollar. However, as oil prices rebounded, the Canadian dollar saw a huge appreciation against the U.S. dollar, with USD/CAD falling from a peak of $1.45 to $1.20 between March 2020 and June 2021.

Interest rate hikes

The U.S. and Canada have been hiking rates as inflation begins to set in. Both currently stand at 2.5% in August 2022. However, traders expect more aggressiveness from the Federal Reserve, as stated by various Fed members. This has led to a rally on the U.S. dollar against the Canadian dollar, although prices did fall when the BoC announced higher rates before the Fed in July.

Inflation

As mentioned, inflation has been taking hold of the U.S. and Canadian economies, and is the primary concern for both central banks. In August 2022, the U.S’s Consumer Price Index stands at 8.5%, while Canada’s is at 7.6%. Generally, inflated energy prices, everything else being equal, will be good for the Canadian economy.

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