Should You Invest In USD/CAD?

• Both are reserve currencies, issued by the central banks of members of the Group of Seven leading economies. A reserve currency is one that features in the foreign exchange reserves of other countries.

• Both finance huge amounts of trade between the two neighbours, including shopping trips by those living along the US-Canadian border. That’s the majority of Canadians. Canadians buy more than $320bn of US goods and services each year, with American’s buying more than $307bn of Canadian products.

• Both are the responsibility of independent central banks unfettered by political interference, the Federal Reserve Board in the US and the Bank of Canada (BOC).

• The US dollar is a default global currency, financing the bulk of world trade and providing the benchmark price for all major commodities. The Canadian dollar has a much more modest role on the world stage.

• Because of the pivotal role of the American dollar, the US is able to run persistent trade deficits, knowing that there will always be someone to take its currency. The Canadians enjoy no such luxury.

• The US and Canada may have an enviably-stable relationship, but their currencies don’t. In the 10 years from spring 2007 to spring 2017, the US dollar was at one point buying 1.46 Canadian dollars and at another just 0.92.

An enduring close alliance and common interests. Both countries are members of the G7, the North Atlantic Treaty Organisation (NATO) and the North American Free Trade Agreement (NAFTA).

The imbalance in size between the two economies. Canada’s weighs in at about $1.5 trillion, while that of the United States is closer to $18.56 trillion. This means major economic developments south of the border cannot fail to have an impact on the Canadian dollar.

Interest-rate changes by the Fed and the BOC. Since the end of 2015, the Fed has embarked on a gradual tightening of monetary policy, whereas the BOC has maintained a softer stance. Unsurprisingly, perhaps, since early 2016 the US dollar has been on a strengthening trend against its Canadian counterpart.

Commodity prices. Canada has a modern service economy but remains a major commodity exporter, from timber and minerals to petroleum, chemicals, wheat and barley. Movements in commodity prices directly impact the Canadian dollar and the fact that these prices are usually stated in US dollars adds another layer of risk.

US demand for Canadian exports. The country takes three-quarters of Canada’s goods and Canada is its main foreign supplier of energy, including oil and gas. This makes President Donald Trump’s proposed renegotiation of NAFTA of great concern to Canada.

1. You could simply buy or sell the currencies concerned, either through your bank or use a trading account with a financial institution. This is a straightforward way of taking a position on these currencies, but it can be expensive and cumbersome.

2. Futures and options, derivative products that let you trade the currencies without taking possession of them. But futures trading can go the ‘wrong way’, potentially wiping out your original stake – and more.

3. Contracts for difference (CFDs) are a relative newcomer to the financial scene but have emerged as the single most popular way to trade in markets of all types. A CFD is a contract between a trader and a broker to pay each other the difference between the price of an asset on the day the contract is signed and the price on the day it is terminated. They are leveraged products, meaning you can gain exposure by investing only a percentage of the full value of the trade you want. Whilst this gives opportunity for greater profit, you risk losing more than your deposit if the market moves against you. A second risk is that rapid price changes can cause your account balance to change quickly. If you do not have enough funds in your account to cover these situations, there is a risk your position may be closed automatically when your balance falls below a certain level, known as the close-out level. Stop-orders can limit risk but, in fast moving markets, prices might rise above or fall below the desired level before a sale can be executed. This may increase losses.

eToro offers CFD trading in US dollar/Canadian dollar

The foreign exchanges do not simply provide a market in currencies in the way that, for example, a supermarket provides a market in groceries. Critically, they are a market in currencies being exchanged for other currencies.

Only a currency can be sold to buy a different currency. This is because currencies are priced in terms of each other. Exchange rates are called ‘reference numbers’ because they refer only to other currencies.

So if some people sell the pound in return for the yen, then, by however small an amount, you would expect the pound-yen exchange rate to move in favour of the yen and against sterling. For one currency to rise, another has to fall.

These are two reserve currencies issued by mature, established democratic neighbours with the most congenial of relations. There will always be liquidity in both currencies, thus no shortage of willing buyers and sellers.

However, the two economies have an unequal relationship, with Canada vulnerable to economic and political upsets in the US.