Canadian Dollar gains ground as jobs data lifts Loonie
- CAD rose 0.56% against USD after January employment data showed unemployment falling to 6.5%
- Labor force participation dropped sharply to 65.0%, driving the jobless rate lower despite 25K job losses
- Manufacturing shed 28K positions as US tariffs weigh on the sector, concentrated in Ontario
The Canadian Dollar (CAD) climbed sharply on Friday, adding half a percent against the US Dollar (USD) after January labor market data showed the unemployment rate dropping to 6.5%, its lowest reading since September 2024. The Loonie found support despite headline employment falling by 25,000, as a sharp decline in labor force participation drove the jobless rate lower. USD/CAD pulled back toward 1.3634, trimming gains accumulated over recent weeks.
Labor market details were mixed. The unemployment rate fell three-tenths of a percentage point to 6.5%, but the improvement came primarily from 94,000 people exiting the labor force rather than from job creation. The participation rate dropped four-tenths to 65.0%, its lowest level since early 2025. Full-time work fell by 27,000, concentrated among core-aged women, while manufacturing shed 28,000 positions; a 1.5% decline that marks the sector's continued struggle with US tariff impacts.
Loonie rebounds on USD weakness
The Canadian Dollar's advance owed as much to broad US Dollar softness as to domestic data. The US Dollar Index (DXY) slipped toward 97.9 on Friday, weighed down by concerns over the US labor market and elevated AI valuations. Fresh US data showed job openings unexpectedly fell to 2020 lows, job cuts hit their highest January total since 2009, and initial jobless claims rose to 231K, well above the 212K forecast. The string of weaker labor data pushed markets to price in Federal Reserve (Fed) rate cuts beginning in June.
While the CAD benefited from the Greenback's pullback, Crude Oil prices offered limited tailwinds. West Texas Intermediate (WTI) barrel prices hovered near $62.50 on Friday, extending losses for the week as easing geopolitical tensions around Iran-US nuclear talks and demand concerns pressured the commodity. Oil markets are set to close their first weekly decline in six weeks, with Iran's confirmation of negotiations reducing near-term supply disruption risks.
BoC stays on hold through 2026
The Bank of Canada (BoC) held its policy rate at 2.25% late last month, signaling that it expects to keep rates unchanged through 2026 barring a shift in the outlook. Governor Tiff Macklem noted that while the economy shows resilience, uncertainty around the upcoming Canada-US-Mexico Agreement review keeps risks elevated. With inflation holding near the 2% target and excess labor market slack persisting, the BoC has indicated the current policy stance is appropriate to help the economy through structural transitions tied to US protectionism and slowing population growth.
Daily digest market movers: Mixed labor data drives CAD rebound
- USD/CAD fell 0.56% to 1.3634, trimming losses accumulated since late January.
- Unemployment rate dropped to 6.5%, lowest since September 2024, driven by falling participation.
- Manufacturing employment fell 28K, largely in Ontario, as tariff pressures bite deeper.
- DXY slipped to 97.9 as weaker US labor data reinforced bets on Fed rate cuts starting in June.
- WTI Crude Oil near $62.50, down for the week as Iran-US nuclear talks ease supply concerns.
- BoC holding policy rate at 2.25% through 2026, citing uncertainty around CUSMA review.
Canadian Dollar price forecast
USD/CAD retreated from sixteen-month highs near 1.37 after the January employment report, with the pair now trading at 1.3634. The move pushed price back below recent resistance and into a familiar consolidation zone. The 50-day Exponential Moving Average (EMA) near 1.38 and the 200-day EMA near 1.39 are both above current price action, signaling that the broader uptrend is testing key support levels.
Short-term support builds near 1.36
The recent pullback toward 1.36 brings USD/CAD into a zone that has acted as support multiple times over the past several months. A sustained break below 1.36 would expose the 1.35 handle, where buyers emerged during the Loonie's rally in late January. On the upside, resistance now sits near 1.37, with the 50-day EMA providing an additional barrier to any immediate recovery attempts.
Momentum indicators suggest the near-term bias has shifted
The Relative Strength Index (RSI) pulled back from overbought levels above 70 earlier this week and now hovers in the mid-50s, leaving room for further downside if selling pressure continues. Friday's sharp reversal candle suggests buyers may defend the 1.36 area, but confirmation is needed. A close below 1.3580 would signal that the recent correction has more room to run, while a recovery above 1.3720 would indicate that the broader bullish trend is reasserting itself.
USD/CAD daily chart
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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