The pairing of the euro (EUR) and Canadian dollar (CAD) is said to be a "cross currency" pairing. A cross currency pairing is defined as being the exchange of two specific global currencies on the forex that does not include the United States dollar (USD). Cross currency pairings are commonly referred to as "cross pairs."
Traditionally, traders and investors interested in exchanging international currencies had to trade for United States dollars before completing the transition into the destination currency. For instance, if an individual was interested in trading euros for Canadian dollars, he had to first exchange euros for USDs, and then trade the USDs for CADs. The creation of the cross pair enables traders to transition between global currencies without being exposed to exchange rate volatilities often present in the USD.
The most frequently traded cross pairs on the forex are:
Considered to be "major" global currencies, the EUR and CAD are among the top-eight most frequently traded in the world. According to the International Bank of Settlements (IBS), the EUR is the second most regularly traded currency, present in 32.0% of all transactions. The CAD ranks sixth globally, and is involved in 5.1% of transactions.
The EUR/CAD is the seventh-most-traded cross currency pairing on the forex, representing .3% of total daily forex turnover. Because the pair normally features a lighter volume than other cross pairs, the EUR/CAD is said to be a "minor cross." The reduced participation rates can lead to limited liquidity and intermittent choppy price action. These attributes prompt traders to evaluate market conditions on an ongoing basis as liquidity is not as stable as in major pairs.
The active trading of cross pairs such as the EUR/CAD affords the investor or trader several unique advantages:
- Portfolio diversification: Trading cross pairs provides insulation from the exchange rate fluctuations present in the USD. Through trading a cross pair, a market participant can avoid exchange rate volatilities brought on by economic factors originating in the United States. This is beneficial during times of American economic, social, or political unrest.
- Opportunity: Discrepancies between international interest rates can provide various opportunities in which to execute carry trades. Also, scrutiny of the many cross currency pairs can add additional avenues for profit, including unique arbitrage possibilities. Forex trading involves a high level of risk and losses can exceed deposited funds.
- Trend friendly: Cross pairs commonly provide a greater magnitude of exchange rate fluctuation, and are prone to strong trends. Because volume is not as substantial as in the trade of major pairs, relatively small amounts of sustained buying and selling activity can create large swings in valuation. The "thin" market depth can be either an advantage or disadvantage, depending upon the strategy. While not ideal for short-term scalping approaches, the limited liquidity can boost the profitability of day and swing methodologies.
EUR/CAD can provide investors a vehicle by which to trade the economics of the European Union (EU) while avoiding undue risk attributable to global macroeconomic factors. For example, the pair typically shows no correlation to US equities markets, specifically the S&P 500. This can be a tremendous asset when attempting to hedge an existing position in one of the majors, or try to capitalise upon the EUR or CAD in isolation.
Traders seeking to trade evolving economic conditions within the EU or Canada may elect to take either a long or short position in the pairing. Factors such as global commodity pricing (energy products), political unrest and monetary policy decisions made by the Bank of Canada and the European Central Bank all contribute to the stability of the EUR/CAD valuation.
Of particular importance to EUR/CAD exchange rate stability is global oil pricing. As one of Canada's largest exports, crude oil plays a key role in economic performance and CAD valuations. Further, the EU imports north of 500 million tonnes of crude oil annually. Although the importance of oil pricing does vary, monitoring the performance of USOIL and UKOIL CFDs is a potentially worthwhile exercise.
Trading The EUR/CAD
When it comes to trading the EUR/CAD currency pair, it is especially important to stay abreast of current events. Any surprise or scheduled influx of external market drivers can make trading the EUR/CAD, or any currency pair, high risk. The real-time emergence of market factors can spike participation, traded volumes and volatility.
Market drivers that may impact the EUR/CAD come in two basic varieties:
Scheduled: Events that are pre-scheduled such as economic reports, elections, or official speeches and summits can spike the volatility of forex currency pairs. A few scheduled events important to the EUR/CAD are EU/Canadian GDP, EU/Canadian CPI, EU/Canadian Unemployment. In addition, official monetary policy decisions from the ECB, BoC and U.S. Federal Reserve can rapidly sway valuations.
Outliers: An outlier is an external factor that comes as a complete surprise to the markets. One prominent example of an outlier is the coronavirus (COVID-19) pandemic of 2020. The uncertainty posed by COVID-19 brought extreme angst to the world's financial markets, destabilising everything from the forex and CFDs to the NASDAQ. During the initial stages of the coronavirus contagion, the EUR/CAD exhibited extreme levels of volatility. For March 2020, the EUR/CAD gained 719 pips (+4.86%), posting a massive 1264 pip monthly range.
Scheduled events and outliers regularly drive increased exchange rate volatility. As a result, seemingly low risk trades can quickly become high risk. During the periods surrounding these occurrences, active traders often place the chaotic price action into context via technical analysis. By doing so, market entry and exit points may be fine-tuned according to advanced charting applications, indicators and tools.
Past Performance: Past Performance is not an indicator of future results.
Key Facts: EUR/CAD
- Currency overview: The euro is the official currency of the European Union. It has the largest circulation among currencies in the region and serves alongside the USD and the Japanese yen as a major world reserve currency.
- Central bank: European Central Bank
- Currency code: EUR
- History: The euro was introduced in 1999 as the official currency of the eurozone, replacing the traditional currencies of 19 nations in the region.
- Economy: The eurozone economy is the largest economy of a supra-national economic bloc in the world, with a GDP of approximately €15 trillion. However, the composition of the eurozone is to change on 31 December 2020. This day marks the end of the Brexit transition period, making the U.K.'s exit from the EU final. The event will reduce the economic footprint of the eurozone.
- Currency subunits: 1 cent = 1/100 of a euro
- Denominations: Bills: €5, €10, €20, €50, €100, €200, €500; Coins: 1c, 2c, 5c, 10c, 20c, 50c, €1, €2.
- Countries and territories using the euro: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Also, Andorra, Monaco, San Marino and the Vatican use the currency under an agreement with the European Union. Two other countries, Kosovo and Montenegro, have adopted the currency unilaterally without an agreement.
- Currencies pegged to the Euro: Benin franc, Bosnia and Herzegovina mark, Bulgaria lev, Burkina Faso franc, Cameroon franc, Central African Republic franc, Chad franc, Denmark krone, Equatorial Guinea franc, Gabon franc, Guinea-Bissau franc, Ivory Coast franc, Mali franc, Niger franc, Republic of the Congo franc, Senegal franc and Togo franc.
Canadian Dollar (CAD)
- Currency overview: The CAD is the official currency of all ten provinces and three territories located in Canada. It's a decimalised currency, meaning that one dollar consists of 100 sub units called "cents."
- Currency code: CAD
- Central bank: Bank of Canada
- History: The origins of currency in Canada can be traced to the mid-17th century with the introduction of coins into the region by French colonists. In 1841, Canada conducted trade using the Canadian pound, a currency based on the pound sterling. Soon to follow in 1858, the Canadian pound was replaced by the Canadian dollar, which was based upon the United States dollar. The Bank of Canada came into being in 1934 and commenced the printing and issue of banknotes in 1935.
- Economy: Canada ranks as the 17th largest global economy in terms of GDP purchasing power parity. Abundant natural resources have spurred economic growth and the exporting sector. Canada ranks 11th in the world in exports, with the leading commodity exports being crude oil, natural gas, electricity, wood pulp and timber.
- Currency subunits: 1 CAD is made up of 100 cents
- Denominations: Bills: CA$5, CA$10, CA$20, CA$50, CA$100; Coinage: ¢1, ¢5, ¢10, ¢25, $1 (known as a "loonie"), $2 (known as a "toonie").
- Currently, no countries peg their currencies to the value of the CAD. The CAD is used for trade in all 10 Canadian provinces and three northern territories. It's also sporadically accepted as legal tender in communities located in the northern US.
- The CAD is considered to be a "major currency" or one of the eight most frequently traded currencies in the world. When paired with the USD, it is considered to be a "major pairing."
This article was last updated on 15th October 2020.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…