Canadian Dollar Index
The Canadian Dollar Index is a measure of the value of the CAD relative to a basket of other major currencies. It is used to gauge the performance of the Canadian dollar and domestic economy. Online brokers also offer their own Canadian Dollar Index product, usually through CFDs, that provides traders with exposure to the Canadian currency. This tutorial will explain how the Canadian Dollar Index works, ways to trade it, plus the top brokers and platforms.
What Is The Canadian Dollar Index?
The Canadian Dollar Index (symbol: CXY) measures the strength of the CAD by comparing it with other key currencies. The index is calculated using a weighted average of the exchange rates of the Canadian dollar against currencies such as the US dollar, the euro, the Japanese yen, the British pound, and the Swiss franc.
The exact weightings of the CXY typically reflect the share of trade of each currency in the basket. For example, the US dollar is normally given the highest weighting as the United States is Canada’s largest trading partner. The weightings of the CXY are reviewed and adjusted periodically to reflect the changing importance of trade between Canada and its trading partners.
Canada’s central bank, the Bank of Canada, also supplies its own Canadian-Dollar Effective Exchange Rate index (CEER), which comprises a basket of 17 currencies including 7 which are traded widely in regions outside their home countries – the US dollar, British pound, Swiss franc, Swedish krona, Japanese yen, Australian dollar and euro – and the currencies of 10 other important trading partners including China, Brazil and Malaysia. The weighting of the basket depends on the trade volume between Canada and these respective countries, with the US taking nearly 50% of the weighting.
Bear in mind that since the CXY is not usually a tradeable asset in itself, you will need to find a broker that offers its own take on the index and this may well have different weightings and currencies. For example, CMC Markets has a Canadian Dollar Index made up of USD, CNH, EUR, GBP, JPY, CHF, AUD, and NOK.
Live Price Chart
Price History
The Canadian Dollar Index tracks the performance of the CAD, which had a period of relative strength between 1996 and the early 2000s but weakened during the global financial crisis of 2008-2009.
Since then, the Canadian dollar has been relatively stable, but its value fluctuates based on various factors such as commodity prices and the strength of the US dollar. The Canadian dollar has been consistently below parity with the US dollar since 2013.
CAD has had a relatively stable exchange rate with many other currencies as well, including the British pound and the euro. However, between 2021 and the end of 2022, it experienced a steady incline with both the euro and the pound, reaching a spike in early 2023. This followed instability in Britain and Europe following political events.
Factors That Determine The Value Of The CAD Index
The value of the Canadian Dollar Index (CXY) is impacted by a variety of factors:
- Commodity prices – Canada is a major producer of commodities such as gold (exporting around $12.5 billion worth of gold annually), as well as fossil fuels and many other hard commodities. A rise in commodity prices can raise the value of CXY.
- Seasons – The CXY can be affected by seasonal factors such as tourism and agricultural exports. For example, during the winter, it may weaken due to a decrease in agricultural exports.
- Stock market performance – The value of the CXY is closely tied to the performance of the Canadian stock market. A strong stock market can boost the value of the CXY.
- Economic indicators – GDP, inflation, and employment can also have an impact on the value of the CXY. These indicators can indicate the overall health of the Canadian economy and help traders predict the direction of the CXY.
Pros Of CAD Index Trading
- Risk: Trading the Canadian Dollar Index (CXY) is usually less risky than trading the Canadian dollar in a pair against a single currency. Since the CXY measures the value of the Canadian dollar relative to multiple other currencies, it is less vulnerable to unforeseen events that can cause sudden price shifts in a particular pair.
- Diversification: Trading the Canadian Dollar Index can provide investors with a way to diversify their portfolio and reduce risk by spreading investments across different currencies.
Cons Of CAD Index Trading
- Limited public data: The CXY is not widely used and there is limited historical data available. This can make it difficult for traders to analyze trends vs the US Dollar Index, for example.
- Not widely available: There is a limited choice of brokers that offer trading on the Canadian Dollar Index.
How To Trade The Canadian Dollar Index
Choose An Instrument
The best Canadian Dollar Index brokers typically offer trading through CFDs (contracts for difference).
These derivatives are popular among retail traders, as they allow speculation on price movements without needing to actually buy or sell the asset in question. Another advantage is that traders can open leveraged trades with CFDs, greatly augmenting the trading power of their capital.
Choose A Broker
Since there is little choice available to retail traders looking for CXY trading, you are likely to only be looking at one or two brokers.
However, as with any online trading, you should ensure that the brokerage fulfils several important criteria before signing up:
- Is the broker regulated and well-received by traders on trusted review websites?
- Does the broker have a transparent and fair pricing structure?
- Does the broker accept the funding methods that work for you?
- Is there a fast and responsive customer service department in case you hit issues?
- Does the broker support a trading platform you are comfortable with, such as MT4?
CMC Markets, for instance, offers competitive trading conditions on its Canadian Dollar Index CFD. Spreads start from 0.3 pips, the minimum order size is 0.01, shorting is allowed, and 1:20 leverage is available.
Tips On Trading The Canadian Dollar Index
- Use live charts to monitor the CXY and track its performance over time. This will help you identify trends and create a forecast for the direction of movement the Canadian dollar may experience.
- Keep in mind the long-term trend when trading the Canadian Dollar Index. While short-term fluctuations can be influenced by a variety of factors, the long-term trend can provide a more accurate picture of the direction of the Canadian dollar.
- As with any financial instrument, trading the CXY carries a certain level of risk. It is important to have a risk management strategy in place to minimize potential losses. This could mean implementing a stop-loss into your trading platform, taking smaller position sizes if the risk seems high, or hedging.
Trading Hours
Opening hours for the Canadian Dollar Index will depend on the trading times of the broker.
CMC Markets, for example, offers online trading on the CAD currency index CFD between 00:00 and 22:00 Monday to Friday. Weekend trading is not available.
Final Word On Trading The Canadian Dollar Index
The Canadian Dollar Index is not normally a tradeable asset and is mostly used to gain insights into the value of the CAD compared to other major currencies, such as the USD. With that said, some online brokers offer their own trading vehicles on the Canadian Dollar currency index, including CMC Markets. Use the tips in this trading guide to get started.
FAQs
How Is The Value Of The CXY Determined?
The value of the Canadian Dollar Index (CXY) is determined by measuring the value of the Canadian dollar relative to a basket of other major currencies. The specific currencies and weightings used to calculate the CXY may vary, but typically include the US dollar, the Euro, the Japanese yen, and the British pound and are normally weighted by the importance of each country by trade.
Where Can I Trade The Canadian Dollar Index?
Not many brokers offer trading on this currency index, which is generally used as a way to gauge Canada’s economic performance. However, a couple of popular brokers offer CFDs on the Canadian Dollar Index, including CMC Markets and IFC Markets.
How Do I Trade The Canadian Dollar Index?
The most straightforward way to trade the Canadian Dollar Index is through a CFD broker such as CMC Markets. Clients can trade with 1:20 leverage and spreads from 0.3 pips. Shorting is also allowed and the minimum trade size is 0.01 lots.