USD/CAD snaps a two-day losing streak, trading near 1.3560 during Tuesday’s Asian session. However, downside risks persist as the Canadian Dollar (CAD) finds support from renewed foreign inflows, underpinned by resilient domestic labor conditions, firm commodity prices, and shifting monetary policy expectations in Canada.
Canada’s Unemployment Rate fell to 6.5% in January, the lowest since September 2024. Stronger full-time employment growth near 3.3% weakened the case for near-term Bank of Canada (BoC) easing, keeping Canadian real returns relatively attractive.
Investors are now awaiting the delayed January US employment report and upcoming CPI data, which are expected to further shape views on the pace of economic cooling and the timing of potential Federal Reserve (Fed) policy easing.
Meanwhile, investor sentiment has improved ahead of a heavy slate of US economic data due this week, which should help gauge the health of the US economy and refine expectations for the Federal Reserve’s policy path. Markets currently expect the Fed to hold rates in March, with a first cut likely in June and a possible follow-up in September.
Adding to the constructive tone, US inflation expectations eased. Median one-year-ahead inflation expectations fell to 3.1% in January, the lowest in six months, from 3.4% in December. Expectations for food prices were unchanged at 5.7%, while broader price expectations held steady at 3% for both three-year and five-year horizons.
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
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