Understanding the Currency: CAD, the Canadian Dollar

Understanding the Currency: CAD, the Canadian Dollar explained by professional Forex trading experts the “ForexSQ” FX trading team. 

Understanding the Currency: CAD, the Canadian Dollar

Oil and the Canadian dollar are closely linked.

The Canadian dollar is often referred to as “the loonie” because the 1-dollar Canadian coin has a picture of a Canadian loonie bird on it. It’s a particular currency in the G10 in two respects. First, it’s a key trading partner to the economy of the world’s reserve currency, the U.S. dollar. And second, the Canadian dollar has unique exposure to the energy sector of commodities, most notably oil via the tar sands of Northern Canada.

Oil and the Canadian Dollar

As the northern neighbor of the United States, the Canadian economy is perceived as a beneficiary of economic growth that takes place in the U.S. But for the Canadian economy to benefit, which would show in a supported or strengthened Canadian dollar, the price of oil must also be supported.

When the price of oil is weak, the Canadian economy and the Canadian dollar are often weak as well. Brent crude, the global benchmark for oil, broke below the 2008 low in late 2015 due to dual concerns of overproduction from oil producers in the Middle and the Far East as well as from a lack of demand. As the price of oil fell, so did the value of the Canadian dollar. This dynamic of weak oil prices along with the strength of the U.S. dollar pushed the price of the USD/CAD currency pair above 1.4000 for the first time since 2004.

Trading the Canadian Dollar

When you understand the dynamics of oil’s effect on the Canadian dollar, you can use that to figure out what the Central Bank wants from the economy.

You can also use the trend in crude oil to help you understand where the higher probability trades are in FX with the Canadian dollar.

When crude oil is exceptionally weak, traders can look to sell the Canadian dollar against strong currencies like the U.S. dollar or the euro.

When crude oil is exceptionally strong, as it was from 2009 through 2011, a trader can look to weak currencies to buy the Canadian dollar against them.

EUR/CAD was a favored currency pair during this period as the strong Canadian dollar continued to strengthen relentlessly against the weakening euro in the wake of the sovereign crisis.

As you become more comfortable with the layout of the FX market, you should be able to pull together trading ideas in a similar fashion.

Some Background and Facts

The currency symbol for the Canadian dollar is CAD. Quote style is USD/CAD 1.4000, and the exchange is Interbank. The central bank is the Bank of Canada.

The Canadian dollar is highly correlated to other commodity currencies like the Australian dollar and the New Zealand dollar. The Canadian Dollar is also positively correlated with the price of West Texas intermediate crude oil.

The best trading time for the CAD is during the New York trading session in the U.S. That would be 7 a.m. to 4 p.m. Eastern time or 1200 GMT to 2100 GMT.

Understanding the Currency: CAD, the Canadian Dollar Conclusion

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