Forex pairs: The Canadian dollar, USDCAD

What is the loonie?

The trading between the US dollar and the Canadian dollar is known as the loonie. The loonie also refers to the one dollar coin introduced by Canada in 1987.

The Canadian dollar is one of the oldest and most stable currencies in the World.

Without doubt, Canada is one of those countries that seem to be safe for private capital in the middle and long-term. In countries where private property is not well treated, like Venezuela or Argentina, we can see what happens to their currencies. And, no, devaluing their currencies does not make them stronger or more competitive.

Loonie CAD forecast

In the global forex market, the CAD, as the Canadian dollar is known, is one of the major currencies and therefore forms one of the major pairs in the forex market: the USDCAD.

However, despite the great liquidity of that pair, it is not an efficient asset for currency speculation.

In my opinion, next to the EURGBP, is the major pair less adequate for trading the forex markets, whether it is day, swing or trend trading.

The problem with this pair – USDCAD – is its small volatility in the medium and long-term.

It is true that it can have strong intraday moves, just like any other forex pair, but if we analyze its long-term trends in percentage terms, we could see very clearly that this pair moves much less than the majority of the major and minor pairs.

We should remember that Canada is a privileged United States neighbor; so much that some people consider it as another state of the Union. It is for that reason that both currencies are quite correlated, like their societies are.

Something similar happens to the EURGBP, or EURSEK, which moves quite a bit, but being close societies do not move so much as with respect to other currencies from distant societies.

For that reason, the USDCAD is not an attractive currency for an efficient trading in forex. This can be clearly seen in the long-term charts, where we can see the primary trends and its relative movement through time.

GBPCAD, EURCAD, CADJPY, AUDCAD

The USDCAD had a primary bullish trend from 1993 to 2001, where it rose a 23%. Later it fell 43% until 2007. It was followed by a bull market of 44% and a bear market of 30%.

The current bull market has had a 35% rise until now.

 

USDCAD forex

 

Seen in this way it seems that the market is fine. We can see how there are bull markets followed by bear markets. Nothing new under the sun.

What happens is that when we compare this pair to other pairs or assets we realize that it is one of the worst performers, at least in the forex markets.

In those 20 years of the USDCAD there are: three bull markets of 23, 44 and 35%, and two major bear markets of 43 and 30%. Not a big deal for twenty years of data.

CADJPY investing

Let´s have a look to other forex Canadian dollar pair: the CADJPY. As usual, every pair that trades against the yen moves in quite a strong way. This is due to the big difference between Japan and America or Europe.

They are all developed countries, but their cultures differ quite a bit, and so their economic cycles.

 

CADJPY forex

 

This pair starts with a bear market of 32% that lasts until 1995. It follows a bull market of 73%, then a bear of 30%. Later there is a bull market of 83% until 2007 followed by a bear market of 44%. Then, another bull market of 34% and a bear market of 24. Finally, there is a 47% bull market (1).

In this pair there are: four bear markets of 32, 30, 44 and 24% and four bull markets of 73, 83, 34 and 47%.

As we can see the number of major trends in the CADJPY is bigger than that of USDCA. And, the CADJPY trends are even stronger in many cases.

We can be sure that for a swing trader, the CADJPY presents more and better opportunities than the USDCAD.

This can be difficult to see at first sight when we look at the long-term charts, but when we study them well we realize what pair moves the most. In this case, it is the CADJPY without a doubt.

GBPCAD investing

Something similar, although to a minor extent, happens in the GBPCAD.

In that pair we can see a lot of bull and bear markets through those 20 years. There are bull markets of 30, 25, 20, 20, 15 and 20%, and bear markets of 23, 15, 22, 30 and 23%. As we can see, there are loads of major trends in this market, although not as powerful as those of the JPY. Another pair that moves in a similar way is the EURCAD. That is because – as we should know by now – that the EUR and GBP are quite correlated, in a similar way to the USDCAD.

AUDCAD Investing?

Something similar happens in the AUDCAD pair because both currencies have a similar correlation to commodity prices, being the AUD the most volatile pair in this case (contrary to the USDCAD, the AUDUSD is a very good pair to trade).

 

GBPCAD forex

 

EURCAD forex

 

AUDCAD forex

 

Of course, this depends on the point of view.

For those who do day trading or automated systems based on indicators, the USDCAD can be a useful pair to trade. They do not really care about long-term volatility.

The USDCAD, being one of the major pairs, has a lot of liquidity. However, after what happened weeks ago with one of the major currencies, the CHF, the term “liquidity” seems like a joke in poor taste.

Canadian dollar swing trading

For those who do swing trading, there are a lot of pairs much more interesting than the USDCAD.

From my point of view, the USDCAD is a pair that I would only trade from a very long-term perspective when I suspect that it is either overvalued or undervalued; for example, in the years of 2001 and 2007.

In this connection, and with the big bull move that we are witnessing nowadays (actually the US dollar is bull against everything lately), we could expect a future bear market in the US or bullish in the CAD.

That means that some years from now, if the market rises even more, there will be a time when a major bear market in the USDCAD pair will start. And, that time would be a good long-term trade opportunity to ride a big trade in the short side, looking for c couple of thousand pips.

For a short-term, trend, or swing trading perspective we had better trade pairs like CADJPY, GBPJPY, AUDJPY, EURUSD or AUDUSD to name a few. In forex, as well as in any other financial market, we should be looking for big moves, unless we are selling options or we are market makers, who love to have “dead” markets.

  1. The current correction of 15% could very well be a bear market already.

Thanks for reading and sharing.