How to Trade USD/CAD: Things You Should Know

The USD/CAD currency pair is a vital component of global foreign exchange markets. It reflects the number of Canadian dollars required to buy one U.S. dollar, providing unique insights into economic strength and trade trends. What distinguishes this pair is its significant daily trading volume, its connection to the U.S. economy, and its global influence.

» Can't keep up with economic influence? Learn to use an economic calendar

1. Understand USD/CAD Dynamics

Economic Strength

Several factors influence the USD/CAD currency pair. The Canadian dollar (also called the "loonie") is particularly responsive to the strength or weakness of the U.S. economy. During events like the COVID-19 pandemic, global investors sought refuge in the U.S. dollar (also called the "greenback") due to the heightened volatility in international markets. This increased demand for the greenback, which raised its value and placed pressure on the loonie.

» Read more about major and minor currency pairs

Commodity Prices

Second, the Canadian dollar has historically found support in higher commodity prices, particularly energy and agricultural commodities. However, despite surges in these commodity prices, the loonie has depreciated by around 30% against the U.S. dollar in recent years. This paradox is partly attributed to the influence of the greenback on crude oil prices, as both West Texas Intermediate (WTI) and Brent prices are denominated in U.S. dollars.

U.S. Dollar and Import Benefits

Finally, a strong U.S. dollar benefits the economy globally, especially regarding imports. Canada, the largest trading partner with $356 billion in annual trade, imports various goods, from wheat to crude oil. This robust dollar enhances U.S. purchasing power for imports.

» Interested in other types of currency pairs? See our guides to exotic currency pairs and cross-currency pairs

2. Trading With CFDs

A contract for difference (CFD) serves as an investment tool mainly used for forex contracts and currency pairs. These instruments enable investors to speculate on price differentials.

In CFD trading, it's essential to identify the right moments to enter and exit the market. Staying informed about news, including key events like Federal Reserve meetings, is crucial for making well-timed trades.

3. Risk Management Strategies

Like everything else in the global financial markets, developing a risk management system is vital, including for USD/CAD trading. One of the most reliable tools to mitigate risk is to employ stop-loss and take-profit orders. The former enables the investor to buy or sell an instrument once it reaches a certain price, while the latter is a limit order that spotlights a specific price when closing an open position.

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