The USD/CAD pair trades in negative territory near 1.3660 during the early Asian session on Tuesday. Another US government shutdown undermine the US Dollar (USD) against the Canadian Dollar (CAD). Nonetheless, the downside for the pair might be limited amid upbeat US economic data.
US President Donald Trump on Monday called on the House to end the partial government shutdown. However, neither Republicans nor Democrats appeared ready to approve the funding package he negotiated with the Senate without first debating their own demands regarding immigration enforcement operations. The Bureau of Labor Statistics (BLS) has suspended data collection and processing, which will delay the January employment report and other key economic releases.
US manufacturing activity expanded by the most since 2022, which might lift the Greenback against the CAD. The US Manufacturing Purchasing Managers’ Index (PMI) rose to 52.6 in January from 47.9 in December, according to the Institute for Supply Management (ISM). This figure came in above the market consensus of 48.5.
“The domestic story coming from the U.S. was also supportive for the dollar in terms of that big surprise from the ISM,” said Rodrigo Catril, a currency strategist at National Australia Bank.
On the Loonie front, the Bank of Canada (BoC) left the overnight rate unchanged at 2.25% at its January policy meeting. This was the second consecutive meeting where rates remained steady. During the press conference, BoC Governor Tiff Macklem emphasized heightened uncertainty due to unpredictable US trade policies, geopolitical risks, and the upcoming review of the Canada-US-Mexico Agreement (CUSMA). Ongoing concerns regarding US trade policy and the upcoming CUSMA review could drag the CAD lower and create a tailwind for the pair.
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.
