FXCM Insights

USDCAD Currency Pair

In this article:
Overview | USDCAD Chart | Key Facts

The USDCAD Currency Pair

In terms of volume, one of the most frequently traded currency pairings on the forex market is the United States dollar (USD) with the Canadian dollar (CAD). Considered to be a major pair, USD/CAD is the most heavily traded currency pairing on the forex involving the Canadian dollar.

USD/CAD is classified as a commodity pairing, which is a currency cross between two countries that possess large amounts of commodities. There are three such pairs on the market: USD/CAD, USD/AUD (Australian dollar) and USD/NZD (New Zealand dollar). While the market value of precious metals often impacts USD/AUD and USD/NZD, energy commodities such as crude oil and natural gas exhibit a substantial correlation to exchange rate fluctuations facing USD/CAD.

The trade relationship between the US and Canada places a great deal of importance on the stability of the exchange rate. For the year end 2015, Canada transported 76.7% of total exports to the United States, while taking in over half of all imports from the US.1)Retrieved 5 October 2016 https://www.cia.gov/library/publications/the-world-factbook/geos/ca.html Conversely, Canada served as the largest single destination for US goods and services (18.6%) while also being the US’s second-largest trade partner behind China.2)Retrieved 5 October 2016 https://www.cia.gov/library/publications/the-world-factbook/geos/us.html

This trade relationship is strongly tied to the flow of energy commodities from Canada to the US. For the year end 2015, Canada served as the largest provider of oil to the US, shipping 3.76 million barrels per day and accounting for 40% of all United States petroleum imports.3)Retrieved 5 October 2016 http://www.eia.gov/tools/faqs/faq.cfm?id=727&t=6 Accordingly, fluctuations in the pricing of crude oil often have a large impact upon the exchange rate of USD/CAD.

The correlation between the pricing of energy commodities and the exchange rate volatility facing USD/CAD can be observed during the crude oil selloff that occurred from September 2014 and February 2015. During this period, Western Texas Intermediate (WTI) crude oil futures fell from a value of US$95.31 per barrel to a bottom of US$42.03 per barrel.

The impact upon USD/CAD was substantial. For the same period, USD/CAD rallied from a value of 1.08724 in September 2014 to a value of 1.25168 in February 2015. The move represented a 15% appreciation for the six-month period, during which time WTI crude oil futures experienced a loss of over 50% of market value.

The exchange rate volatility facing USD/CAD brought on by the devaluation in crude oil had substantial consequences for Canada. For the first time since 2009, the Canadian economy experienced a shrinking GDP, weakening dollar and a slip into recession.4)Retrieved 5 October 2016 https://www.thestar.com/business/2015/09/01/canadian-economy-in-recession-gdp-figures-show.html For the US, lower energy prices served as a catalyst for positive GDP growth and wider-spread economic stimulus.

The dramatic depreciation in the value of crude oil for the period September 2014 to February 2015, and the simultaneous appreciation of USD/CAD, is a good illustration of the potential volatilities facing a commodity pairing. While only one aspect of a complex economic landscape, USD/CAD and its relationship to energy commodity pricing serve as an important indicator of the economic health of both nations.

USD/CAD Chart


USD/CAD: Key Facts

U.S. Dollar (USD) Canadian Dollar (CAD) Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

References   [ + ]