What is USD/CAD (U.S. Dollar/Canadian Dollar)?
USD/CAD is the abbreviation for the U.S. dollar versus Canadian dollar (USD/CAD) currency pair. The quote given for the USD/CAD currency pair tells the reader how many Canadian dollars (the quote currency) are needed to purchase one U.S. dollar (the base currency). Trading the USD/CAD currency pair is also known as trading the "loonie," which is the name for the Canadian one dollar coin.
Understanding USD/CAD (U.S. Dollar/Canadian Dollar)
The value of the USD/CAD pair is quoted as 1 U.S. dollar per X Canadian dollars. For example, if the pair is trading at 1.20 it means that it takes 1.2 Canadian dollars to buy 1 U.S. dollar. Although the USD/CAD currency pair has reached parity at different points in history, the U.S. dollar has traditionally been the stronger of the two currencies. The USD/CAD currency pair is quite actively traded as there are significant business ties between the two nations.
Factors that Affect the USD/CAD Currency Pair
The USD/CAD is affected by factors that influence the value of the U.S. dollar and/or the Canadian dollar in relation to each other and other currencies. For this reason, the interest rate differential between the Federal Reserve (Fed) and the Bank of Canada (BoC), will affect the value of these currencies when compared to each other. When the Fed intervenes in open market activities to make the U.S. dollar stronger, for example, the value of the USD/CAD cross will increase because it will take more Canadian dollars to purchase the stronger U.S dollar.
The value of the Canadian dollar is also highly correlated with the price of commodities, especially oil. Because the Canadian economy is heavily reliant on oil, the price of oil dictates the health of the economy and the currency itself. For this reason, the Canadian dollar is often labelled as a commodity currency.
USD/CAD and Parity
As mentioned, the USD/CAD pair has seen its traditional relationship hit price parity. For example, in the aftermath of the Great Recession and the subsequent quantitative easing from the U.S. Federal Reserve, the Canadian dollar soared against the U.S. dollar to trade below parity, eventually reaching 0.95. In fact, almost all of the instances of parity have been related to periods of U.S. financial difficulty or high oil prices—sometimes both. In 2016, however, oil prices slumped to decade-lows, trading below $30 a barrel. Consequently, the Canadian dollar hit a record low, trading to 1.46. This meant it required 1.46 Canadian dollars to buy 1 U.S. dollar.