CAD explained: A guide to the Canadian dollar

The Canadian dollar is the currency of a top-ten global economy and reflects the strength of Canada's economy, as well as being a proxy for its key exports such as oil. Discover everything you should know about CAD before you open a position.

Canada

The Canadian Dollar, or ‘loonie’, is the national currency of Canada, known by the abbreviation CAD. It is consistently one of the eight most traded currency pairs in the world. Read on for more on the economy of Canada, the history of its currency, and the considerations to make when trading it. 

How to trade CAD

You can trade the Canadian dollar with us via these easy steps:

  1. Open an account, or log in if you’re already a customer 
  2. Search for the forex pair you want to trade in our award-winning platform 
  3. Choose your position and size, and your stop and limit levels 
  4. Place the trade

Economy of Canada

The economy of Canada ranks as the ninth-largest by nominal GDP in the world, with a GDP of $1.5 trillion CAD as of 2020.  

The Bank of Canada is the country’s central bank, which is responsible for maintaining financial stability and overseeing monetary policy.

The history of Canada’s economy charts a journey from an indigenous hunting and farming society, with the trading of items such as fur and beaver pelts, through to urbanisation and industrialisation following the arrival of European settlers in the 16th century. Although, like many developed nations, the country’s economy today is dominated by services, Canada’s natural resources such as oil, natural gas, timber, and various minerals make the country’s primary sector of key importance.

Its economy also boasts a strong commercial fishing and seafood industry as well as being a leader in entertainment software. Canada’s export trade accounts for some $390 billion, with the largest trading partner being the US, accounting for $338.2 billion of that figure. China is a distant second, importing $18.8 billion of goods from Canada. On the imports side, Canada relies on the US for 51.3% of its imports, numbering $222 billion in 2020.

History of the Canadian Dollar

The history of the Canadian dollar began shortly after the 1867 Canadian Confederation. Prior to the currency’s introduction, early periods of bartering among Inuit and First Nations inhabitants gave way to adoption of the British Pound and currencies linked to the US dollar when settlement patterns changed.

The Canadian dollar was originally partially backed by gold, but Canada moved away from the gold standard permanently after Britain’s decision to do so during the Great Depression in 1931. The Canadian dollar has since moved between fixed and floating exchange rates.

The Bank of Canada was established in 1935 and initially issued a series of ten Canadian banknotes, which were reduced in number over time. Soon after, the chartered banks of the country were afforded lesser power to issue their own notes, and the mid 20th century saw the Bank of Canada become the sole issuer of paper currency.

What moves the price of the Canadian dollar?

The price of the Canadian dollar is impacted by a range of fundamental drivers that affect the supply of, and demand for, the currency. These include:

Monetary policy

When central banks seek to curb excessive inflation, they will often consider raising interest rates to encourage saving over spending in the economy and dampen price rises across goods and services. In turn, higher interest rates attract foreign investment, in this case increasing the demand for CAD and raising its value against other currencies.

An example of this was on July 12 2017, when the Bank of Canada raised rates for the first time in seven years, pushing down USD/CAD from 1.2913 to 1.2422 over the following two weeks.

Oil prices

Oil prices are closely linked with the strength of the Canadian dollar, particularly in the currency pair USD/CAD, due to Canada’s status as one of the world’s biggest oil producers and the pricing of the commodity in USD. When there is a large volume of oil traded from Canada to the US, demand is created for Canadian dollars, pushing up CAD and often pushing down the USD/CAD pair.

A high oil price also means higher USD earnings for Canada on its exports, which also serves to push up CAD. Conversely, lower demand and lower prices reduce the flow of USD into Canada, pushing down CAD and having a bullish effect on the USD/CAD pair. This was exemplified by the March 2020 oil collapse, with CAD falling in turn against a range of currencies.

Of course, balance of trade concerns a range of other raw materials and commercial and industrial products, so traders interested in CAD should keep a finger on the pulse of how Canada’s other key sectors are performing over time.

Interested in trading oil? Find out how to start oil trading

Economic data releases/news events

Data releases are capable of conveying fundamental information that may inspire traders to take a position on particular currencies. For example, inflation as measured by the CPI can influence interest rates, as discussed above, meaning traders might expect runaway inflation to trigger rate hikes that see more demand for CAD.

Other measures to look out for are sentiment, which shows whether traders are net long or short, consumer confidence, which can be a benchmark for the direction of the economy, retail sales, services and manufacturing PMIs, and GDP itself, the definitive measure of economic activity.

Popular CAD currency pairs

USD/CAD

USD/CAD is the forex ticker for the exchange rate between the US dollar and the Canadian dollar. It tells traders how many Canadian dollars are needed to buy one US dollar in real time.

The pair is consistently in the top ten most-traded currency pairs in the world, and therefore traders can expect good liquidity and tight spreads.

As the pair is related to both the US and Canadian economies, traders should be mindful of the events that can move each, such as Federal Reserve and BOC policy, as well as the interest rate differential between the central banks. Additionally, due to CAD’s correlation with commodities such as oil and its pricing in USD, it is useful to observe the oil price for clues as to where USD/CAD could be headed next.

EUR/CAD

EUR/CAD is the forex ticker for the exchange rate between the Euro and the Canadian dollar. It tells traders how many Canadian dollars are needed to buy one Euro in real time.

As it is not in the top ten most traded pairs, EUR/CAD is less liquid than major pairs such as USD/CAD. However, it can be more volatile than many of the majors, leading to potentially profitable movements – as well as commensurate risk of course. As with all CAD pairs, traders should be mindful of the impact of oil prices, but also European Central Bank meetings in addition to BOC ones.

AUD/CAD

AUD/CAD is the forex ticker for the exchange rate between the Australian dollar and the Canadian dollar. It tells traders how many Canadian dollars are needed to buy one Australian dollar in real time.

As another of the lesser-traded pairs, AUD/CAD is less liquid than major pairs and can also see big swings. While Australia and Canada do not trade with each other that much, they both share a status as commodity currencies, which means that the strength of each currency can be influenced by the respective country’s supply and demand patterns and relationship with their trade partners.

CAD trading hours

The Canadian dollar is available to trade 24 hours a day, five days a week – from 10pm (GMT) on Sunday evening to 10pm (GMT) on Friday night.

The best time of day to trade CAD will depend on which pairing you decide to focus on. As a rule, each pair will see the most movement when its sessions overlap, but this is less of a concern for the most traded CAD pair, as USD/CAD shares most of the same timezones.

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