Canadian Dollar holds losses near 1.3600 as US jobs data dims Fed rate cut expectations
- USD/CAD trades with mild gains near 1.3615 in Friday’s Asian session.
- The stronger US jobs report tempers bets for more Fed rate cuts.
- Fed’s Miran said US monetary policy is tighter than he thought.
The USD/CAD pair posts modest gains around 1.3615 during the Asian trading hours on Friday. The US Dollar (USD) edges higher against the Canadian Dollar (CAD) amid expectations that the Federal Reserve (Fed) will not cut interest rates in the near term. The US Consumer Price Index (CPI) inflation report will be in the spotlight later on Friday.
The US Nonfarm Payrolls (NFP) rose by 130,000 in January, above the market consensus of 70,000, while the Unemployment Rate edged lower to 4.3% during the same period. The recent stronger-than-expected US jobs data reduces the chances the US central bank will see a need to cut interest rates again by midyear, which underpins the Greenback against the CAD.
Meanwhile, crude oil prices fall amid expectations of a slowdown in global oil demand for 2026. This, in turn, weighs on the commodity-linked Loonie. It is worth noting that Canada is a major oil-exporting country, and low crude oil prices generally have a negative impact on the CAD.
On the other hand, dovish remarks from Fed officials could drag the USD lower in the near term. Fed Board of Governors member Stephan Miran said on Friday that monetary policy has passively tightened. Miran added that the central bank can afford to have lower interest rates.
Traders currently priced in nearly a 92% odds that the Fed will hold rates steady at its next meeting, although the chance of a rate cut at its June meeting is now at nearly 50%, according to the CME FedWatch tool.
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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