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Understanding Currency Pairs: What to Know Before Trading USD/CAD

   

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The United States and Canada have vastly different economic structures, with Canada leaning toward more liberal economic policies and looser immigration regulations than its southern counterpart. 

While the U.S. depends on the economic boost of educated, talented immigrants entering its workforce, the country also benefits from a much larger volume of trading activity, as well as a mature presence in virtually every major global industry.

Despite these differences, USD and CAD tend to mirror each other. This is due in large part to geographic proximity and a strong trade relationship between the two countries. Yet even with this strong positive correlation between the currencies, certain economic triggers can create divergences in the value of these currencies, resulting in limited but lucrative USD/CAD earnings potential for traders.

Cashing In on Canadian Commodities

Commodities have a much larger impact on Canada’s economy than on its U.S. counterpart. As a result, the value of the Canadian dollar can be heavily influenced by big shifts in any of these markets.

For example, Canada’s economy is heavily dependent on the price and market demand of oil. To a lesser extent, the markets for mineral mining, wood exports, and agricultural grains all play significant roles in the state of Canada’s economic health at any given moment. 

Traders can use this information to their advantage by tracking industry news and trends, including government reports on oil and commodities production, and forecasts for future demand. All of these news sources could provide an early signal of USD/CAD price volatility.

Global Market Growth That Sidelines CAD

With an economic infrastructure spanning a wide range of industries and commodities, the United States has a stable economic footing that positions it to capitalize on the boom taking place in any particular industry—especially in contrast to CAD.

To some extent, the United States’ economic success is a rising tide that typically lifts the Canadian dollar. But significant upswings or downswings in the U.S. market can still create value gaps that forex traders may be eager to exploit.

Economic swings driven by tech are one such example. Because Canada’s presence in the tech industry remains much smaller, in terms of its economic influence, than what the United States and many other countries enjoy, fluctuations stemming from the tech industry tend to affect USD more than CAD. 

Capitalizing on these macroeconomic tech trends is one way to use USD/CAD to turn a profit.

Using Economic Policy to Identify Opportunities

In some cases, the price movement of USD/CAD is baked into the different economic policies each country has established. A prime example of this is the housing market collapse the United States suffered in the late 2000s. This collapse was driven by imprudent mortgage and banking policies that were specific to the United States, resulting in a swift economic crash.

The recession in the United States, the world’s largest economy, had a ripple effect throughout the global market. But certain currencies, including CAD, were spared the brunt of this fallout. This is partly because Canada’s banking and mortgage policies didn’t allow for the risky behavior that ultimately felled the U.S. housing market. 

Some USD/CAD traders leveraged this forex pairing to spare themselves the worst of the economic fallout, curbing losses that might have been worse had they not taken advantage of Canada’s stronger economic footing.

Carry Trade

Om Often the US and Canandian central banks will set different interest rates. Traders can pay attention to the differences and if they become large enough they may want to hold a position that receives the overnight interest differential (swaps) which can generate a consistent daily income to offset short term price swings.

Conclusion

Traders should focus on creating a strategy for evaluating these economic triggers, as well as relevant chart patterns, before engaging in high-volume trading activity involving USD/CAD.

For a novice investor, USD/CAD may seem too closely aligned to offer much value when it comes to forex trading. However, by understanding the economic triggers that send these currencies in opposite directions, traders can find opportunities to turn a profit in isolated situations. 

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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