Foreign exchange (forex) trading is a popular activity for currency speculators, and Canadian dollar pairs provide an excellent opportunity for profit. However, forex is not a market for the unprepared, and investors should thoroughly do their homework before entering the market.
In particular, Canadian dollar pair traders need to understand the special or unique drivers that influence the pair values. Here are some of the more important factors to consider if you’re looking at trading CAD.
Key Takeaways
- Canadian dollar exchange rates are primarily driven by demand for Canadian goods and services and the frequency at which people buy and sell its dollar.
- Traders should consider current economic conditions, commodity prices, and capital inflows when trading CAD pairs.
- The Canadian economy is tied to the economy of its southern neighbor, the U.S., so conditions there should be monitored closely as well.
Canadian Dollar Drivers
The Bank of Canada attributes dollar price changes primarily to two factors: demand for Canadian goods and services and the frequency at which people in foreign exchange markets buy and sell them.
Additionally, the bank says that interest and inflation rates relative to other countries and demand for Canadian investment instruments help drive its currency value.
Note
The Canadian dollar is often called the “loonie” because of the appearance of a loon on the back of the C$1 coin.
Economic Data
Forex traders incorporate a much larger range of economic data into their trading decisions than stock traders, and their speculative outlooks can move rates just as investor optimism or pessimism can move a stock above or below the value its fundamentals suggest.
Major economic data used by traders include the release of GDP, raw material prices, retail sales, industrial production, inflation, and trade balances. This information is released at regular intervals, and many brokers and financial information sources like the Wall Street Journal and Bloomberg make this information freely available. Traders also note employment and interest rates (including scheduled meetings of the central bank) and the daily news flow, such as natural disasters, elections, and new government policies.
Commodity Prices
As is often the case with countries that rely on commodities for a sizable portion of their exports, the performance of the Canadian dollar is often related to the movement of commodity prices. In the case of Canada, the price of oil is particularly significant for currency moves, and investors tend to go long on loonies and short on oil importers (such as Japan, for instance) when oil prices are increasing. Similarly, there is some impact on the loonie fiscal and trade policy in countries like China and other countries that are major Canadian material importers.
Capital Inflows
Capital inflows can also drive action in the loonie. When commodity prices are higher, there is often increased interest in investing in Canadian assets, and that influx of capital can impact exchange rates. That said, the carry trade is not so significant for the Canadian dollar.
Canadian Dollar Pairs
The Canadian dollar is popularly traded against many currencies, with the three highest trading volumes occurring on the CAD/CNH (Chinese Yuan Renminbi Offshore), CAD/ZAR (South African Rand), and USD/CAD.
Other popular pairs, ranked by trading volume on Jan. 18, 2025, are:
- CAD/GBP (Great Britain’s pound)
- CAD/HUF (Hungarian forint)
- CAD/NZD (New Zealand dollar)
- CAD/JPY (Japanese Yen)
- CAD/DKK (Danish krone)
- CAD/MXN (Mexican peso)
- CAD/PLN (Polish zloty)
- CAD/CHF (Swiss franc)
- CAD/AUD (Australian dollar)
- CAD/SGD (Singapore dollar)
- CAD/EUR (Eurozone)
- CAD/NOK (Norwegian krone)
- CAD/SEK (Swedish krona)
- CAD/HKD (Hong Kong dollar)
The Economy Behind the Canadian Dollar
Canada was ranked tenth in terms of GDP (measured in U.S. dollars) in 2023. It has enjoyed relatively strong growth, with three relatively brief periods of recession in the early 1990s, 2009, and 2020. Canada has had persistently high inflation rates, but better fiscal policy and an improved current account balance have led to lower budget deficits, lower inflation, and lower inflation rates.
In analyzing the economic situation in Canada, it is also important to consider Canada’s exposure to commodities. Canada is a meaningful producer of petroleum, minerals, wood products, and grains, and the trade flows from those exports can influence investor sentiment regarding the loonie.
The average age of Canada’s population is high compared to global standards, which means it has a higher percentage of middle-aged and older citizens than many other developed countries. Canada has a liberal immigration policy, however, and its demographics are not particularly troubling for the long-term economic outlook.
The relationship between Canada and the United States gives Canadian dollar traders a reason to watch the events in the United States. While Canada has pursued very different economic policies, the reality is that conditions in the United States inevitably spill over into Canada to some extent.
Unique Factors for the Canadian Dollar
Given Canada’s relative economic strength, the country has a somewhat high interest rate among developed economies. Canada also enjoys a reputation for balanced fiscal management and finding a workable middle path between a state-dominated economy and a more hands-off approach. This is relevant during periods of global economic uncertainty—though not as popular a reserve currency as the U.S. dollar, the Canadian dollar ranks seventh as a global reserve currency.
The Canadian dollar is also uniquely tied to the strength of the U.S. economy. Though it would be a mistake for traders to assume a one-to-one relationship, the United States is a huge trade partner for Canada, and U.S. policies can have significant influence over the course of trading in the Canadian dollar.
What Session Is CAD in Forex?
Because the markets open and close globally at different times, they overlap to create a 24-hour weekday forex session. However, the Canadian dollar generally picks up when the U.S. market opens, about 1 p.m. GMT (8 a.m. ET).
What Is CAD in Forex Trading?
CAD is the ISO code for the Canadian dollar, Canada’s official currency.
Is Forex Trading Legal in Canada?
Yes, forex trading is legal. If you’re considering it, you should ensure the broker you choose is licensed by the Canadian government.
The Bottom Line
Currency rates are notoriously difficult to predict, and most models rarely work for more than brief periods. While economics-based models are seldom useful to short-term traders, the country’s economic conditions do shape long-term trends that create profitable trading opportunities.