The Canadian dollar (nicknamed
the Loonie, after the local bird
pictured on domestic currency notes) trades according to the same macroeconomic
fundamentals as most other major currencies. That means you'll need to closely follow
Bank of Canada (BOC) monetary-policy developments, current economic data,
inflation readings, and political goings-on, just as you would any of the other
majors.
A key element to keep in mind
when looking at USD/CAD is that the trajectory of the Canadian economy is
closely linked to the overall direction of the U.S. economy. The United States
and Canada are still each other’s largest commercial trading partners, and the
vast majority of Canadians live within 100 miles of the U.S./Canadian border.
Even the BOC regularly refers to the U.S. economic outlook in its forecasts of
Canadian economic prospects. So I don’t think it’s an overgeneralization to say
that as goes the U.S. economy, so goes the Canadian economy. But it’s a
long-term dynamic, making for plenty of short-term trading opportunities.
The relationship between the U.S.
and Canadian economies is constantly evolving. The heightened demand for
natural resources from China and other rapidly developing economies, for
example, potentially supplants U.S. demand with overall global growth. In this
light, be sure to factor in the global economic outlook when evaluating the
Canadian outlook.
Geography also plays a role when
it comes to U.S. and Canadian economic data, because both countries typically
issue economic data reports around the same time each morning or only a few
hours apart. At one extreme, the result can be a negative USD report paired
with strong Canadian data, leading to a sharp drop in USD/CAD (selling USD and
buying CAD). At the other end, strong U.S. data and weak Canadian numbers can
see USD/CAD rally sharply. Mixed readings can see a stalemate,-but it always
depends on the bigger picture.
Trading
USD/CAD by the numbers
The standard market convention is
to quote USD/CAD in terms of the number of Canadian dollars per USD. A USD/CAD
rate of 1.1800, for instance, means it takes CAD 1.18 to buy USD 1. The market
convention means that USD/CAD trades in the same overall direction of the USD,
with a higher USD/CAD rate reflecting a stronger USD/weaker CAD and a lower
rate showing a weaker USD/stronger CAD.
USD/CAD has the USD as the
primary currency and the CAD as the counter currency. This means
- USD/CAD is traded in amounts denominated in USD. For online currency trading platforms, standard lot sizes are USD 100,000, and mini lot sizes are USD 10,000.
- The pip
value, or minimum price fluctuation, is denominated in CAD.
- Profit and loss register in CAD. For a standard lot position size, each pip is worth CAD 10, and each pip in a mini-lot position is worth CAD 1. Using a USD/CAD rate of 1.1800 (which will change over time, of course), it that equates to a pip value of USD 8.47 for each standard lot and USD 0.85 for each mini-lot.
- Margin calculations are typically based in USD, so to see how much margin is required to hold a position in USD,/CAD it’s a simple calculation using the leverage ratio. At 100:1 leverage, for instance, $1,000 of available margin is needed to trade 100,000 USD/CAD, and $100 is needed to trade 10,000 USD/CAD.
USD/CAD is unique among currency
pairs in that it trades for spot settlement only one day beyond the trade date,
as opposed to the normal two days for all other currency pairs. The difference
is due to the fact that New York and Toronto, the two nations’ financial
centers, are in the same time zone, allowing for faster trade confirmations and
settlement transfers. For spot traders, the difference means that USD/CAD
undergoes the extended weekend (three day) rollover after the close of trading
on Thursdays, instead of on Wednesdays like all other pairs, assuming no
holidays are involved.
Canadian
events and data reports to watch
On top of following U.S economic
data to maintain an outlook for the larger economy to the south, you’ll need to
pay close attention to individual Canadian economic data and official
commentaries. CAD can react explosively when data or events come in out of line
with expectations. In particular, keep an eye on the following Canadian
economic events and reports:
- Bank of Canada speakers, rate decisions, and economic forecasts
- Employment report
- Gross domestic product (GDP) reported monthly
- International securities transactions
- International merchandise trade
- Leading economic indicators
- Wholesale and retail sales
- Consumer price index (CPI) and BOC CPI
- Manufacturing shipments
- Ivey Purchasing Managers Index
