Canadian Dollar gathers strength ahead of employment report
- USD/CAD softens to near 1.4220 in Friday’s early European session.
- Canadian employment data for September will be in the spotlight on Friday.
- Trump dismissed the possibility of attacking Iran before the US midterm elections.
The USD/CAD pair declines to around 1.4220 during the early European trading hours on Friday. The Canadian Dollar (CAD) strengthens against the US Dollar (USD) as the gap between US and Canadian yields narrowed from the historically wide levels seen earlier in the week. All eyes will be on Canada's September employment report later on Friday.
Canada’s two-year bond yield was trading around 152 basis points (bps) below the comparable US yield, narrowing from 158 bps on Monday, when the spread reached its widest level since February 2025.
Economists expect employment in the Canadian economy to increase by 7,000 in September following a sharp decline of 41,700 in the previous month. Meanwhile, the Unemployment Rate is projected to rise to 6.5% in September from 6.4% in August. This report could provide further insight into the health of the Canadian economy and influence expectations for the Bank of Canada’s (BoC) future monetary policy decisions.
However, a decline in crude oil prices might cap the upside for the commodity-linked Loonie. US President Donald Trump said on Thursday that Washington would not attack Iran before November’s midterm elections, per Reuters. He emphasized ongoing "productive discussions" with Tehran. It is worth noting that Canada is a major oil-exporting country, and high crude oil prices generally have a positive impact on the Loonie.
USD/CAD steadies near recent highs as Rabobank flags policy divergence
Strategists at Rabobank highlight that, “after a spectacular CAD sell off which lasted the past month, from September 9 to October 5 USD/CAD is now trading sideways around 1.425, after failing to break above resistance at 1.43 on October 5, but still marking a dramatic retracement from September’s low of 1.373.” Against this backdrop, they argue that policy divergence between the US and Canada remains the key driver, noting that, “therefore, we are forecasting a marginally widening differential from 175bp now to 200bp by the end of this year, where we expect it to stay throughout 2026.”
Rabobank expects this rate gap to underpin further upside in the pair, stating that, “we expect this policy divergence to push USD/CAD through the resistance trend line (see Figure 1) and make a run for 1.45.” They add that, “given the widening differential, coupled with the potential for higher US yields post-US midterms, we see USD/CAD trading up to 1.45 on a three-month view.”
At the same time, Rabobank points out that domestic Canadian dynamics are not straightforward. “Therefore, despite weak economic activity, and a deteriorating trade dynamic with the US, the Canadian OIS curve is implying almost four more hikes from the Bank of Canada by September of next year,” they observe, underscoring the tension between softer growth and a still-hawkish policy path.
Waller flags more hikes but flexible pace keeps Dollar bulls cautious
Fed's Waller delivered a distinctly hawkish tone, with an 8/10 FXS Speechtracker score standing above the 7.2/10 historical average, underscoring a stronger-than-usual tightening bias. The insistence that more hikes are needed, even as Waller stresses flexibility and non-consecutive moves, signals a prolonged restrictive stance driven by persistent inflationary forces from AI investment and energy shocks, alongside evidence of a strengthening economy and a solid labor market. The warning that nearly 5-1/2 years of above-target inflation could unanchor expectations reinforces a bias toward keeping policy tight, even if the path of hikes is less linear.
The FXS Fed Sentiment Index rose by 0.42 points to 138.34, firmly in hawkish territory and consistent with the elevated FXS Speechtracker reading. This move confirms that markets interpret Waller's emphasis on further hikes and signaling over strict forward guidance as supportive of a stronger Dollar backdrop, even if the timing of additional tightening remains flexible.
Technical Analysis: USD/CAD maintains a constructive outlook above the 100-day SMA
In the daily chart, USD/CAD retains a bullish near-term bias as spot holds above both the 100-day moving average (MA) and the Bollinger middle band. The pair is advancing within the upper half of the recent volatility envelope, while the Relative Strength Index (14) at about 65 suggests firm but not yet extreme upside momentum, hinting that buyers still control the tape as long as these underlying levels remain intact.
On the downside, initial demand is seen at the Bollinger middle band around 1.4125, followed by stronger support at the 100-day MA near 1.4015 and the lower Bollinger band close to 1.3895. On the topside, the next notable resistance aligns with the upper Bollinger band at roughly 1.4355, where a clear break would open the way to further gains, whereas failure to clear this cap could trigger a corrective pullback toward the aforementioned supports.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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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