Major Currency Pair USDCAD a.k.a the “Loonie”

Once, Canada pegged its dollar to the US dollar, fixing the exchange rate between them. Trading USDCAD would have been pointless since the rate would never move. However, in 1970, the CAD became a free-floating currency, controlled by the Bank of Canada (in the same way the Federal Reserve has controlled the USD since 1913). So, since 1970, speculating on USDCAD as a currency pair has been possible. People call the Canadian $1 coin the ‘Loonie’ because its reverse side features a loon, a common bird.

What type of currency pair is USDCAD?

USDCAD is not one of the traditional four major currency pairs (EURUSD, GBPUSD, USDJPY and USDCHF) however traders and economists who agree upon seven major currency pairs include USDCAD as one of the extra three, alongside AUDUSD and NZDUSD.

People know these three as ‘commodity’ pairs because they originate from countries with significant commodity reserves. Their value closely tracks the value of those commodities.

The relationship between the CAD and Oil

Canada’s expansive, largely untouched landscapes are rich in natural resources like timber and fuels. The Canadian economy is deeply dependent on the production and export of commodities, with oil and fuels representing the largest portion of the country’s exports. Consequently, oil prices play a pivotal role in shaping the nation’s economic health.

When oil prices rise, Canada earns more U.S. dollars for each barrel of oil it exports. As a result, the influx of U.S. dollars into Canada increases compared to the supply of Canadian dollars, boosting the value of the Canadian dollar.

Trading USDCAD using principles of fundamental analysis

Last year, 2024, the average daily movement on USDCAD was approximately 63 pips. The monthly range tends to fall between 500-800 pips. These numbers are typical of the stability you would associate with other majors, such as EURUSD, which had an average daily movement of 65pips. Trading this pair is an attractive proposition for both technical and fundamental traders.

From a fundamental analysis perspective, since the US and Canadian economies are some of the largest in the world, a lot of data is readily available, with frequent announcements made. Traders will account for the net effect of what is happening in the respective economies.

For example, if the Bank of Canada decreases interest rates while the Federal Reserve increases theirs. This may be a strong indicator to enter a Buy position. Experts expect the USD to strengthen, while they predict the CAD will likely weaken.

On the other hand, if both central banks announce a similar monetary policy, the net effect on USD/CAD will be unclear. Traders will need to consider other clues, such as economic data or market sentiment, to determine the pair’s direction.

If the Canadian government reports an increase in Crude Oil prices, this could signal a move. Crude Oil prices are positively correlated with the CAD.

Additionally, if the US reports lower-than-expected non-farm payroll numbers, it would further support a Sell opportunity.

Trading USDCAD using principles of technical analysis

From a technical analysis standpoint, trends can be clearly established. The market depth is usually very large, and orders can be reliably filled. Historically, short-term and long-term support and resistance levels have been repeatedly identified.

These levels can be used alongside indicators when trading. Concerning technical indicators, the usual suspects can be useful when trading USDCAD.

Moving Averages (MA)

USDCAD is heavily influenced by the factors mentioned earlier. Moving averages help smooth out these influences by focusing on overall price trends.

Short-term moving averages, like the 10- or 20-day, are useful for identifying quick trend shifts. These shifts are often connected to changes in oil prices.

For longer-term trends, the 50- and 200-day moving averages can be useful. They indicate when broader economic trends, such as sustained growth in the US or Canada, start to affect the currency pair.

Bollinger Bands

USDCAD can experience significant breakouts or reversals during key economic releases or interest rate decisions. Bollinger Bands are useful for identifying these moments, as they highlight volatility and potential breakouts.

During periods of low volatility, such as when there’s little major news, a Bollinger Band squeeze often occurs. This typically signals an impending breakout.

For instance, a squeeze followed by a sharp move above the upper band could indicate a strengthening USD trend, potentially driven by hawkish Fed expectations or weak Canadian economic data.

Relative Strength Index (RSI)

Given that USDCAD often trades in ranges during periods of economic stability, the RSI is especially helpful for identifying overbought or oversold conditions, signalling potential reversals. For instance, trade tensions can push USDCAD into overbought territory when the USD strengthens as a safe-haven asset.

Traders will monitor the RSI for oversold conditions (below 30) during times of weak CAD, such as oil price downturns, or overbought conditions (above 70) if the USD is gaining strength amid global economic concerns.

Divergences in RSI are particularly useful with USDCAD, as they often precede reversals due to shifts in interest rate expectations or key economic data.

Moving Average Convergence Divergence (MACD)

The MACD is useful for catching momentum-driven moves in USDCAD, particularly during periods of monetary policy divergence between the Fed and the Bank of Canada. Bullish or bearish crossovers that align with economic data or central bank announcements can confirm the strength or weakness of USDCAD. For example, if the Fed adopts a hawkish stance while the Bank of Canada remains dovish, a bullish MACD crossover could support a rising USDCAD trend.

Combining these indicators can lead to more accurate signals and reduce false readings. A multi-indicator approach offers traders a clearer understanding of USDCAD’s price action, trend strength, volatility, and possible reversal points.

Where can USDCAD be traded?

Regulated brokers like IronFX offer this currency pair, typically providing low spreads with fast and reliable execution times.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.