USD/CAD holds steady near 1.3550 as US Retail Sales data looms

USD/CAD flat lines around 1.3560 in Tuesday’s early European session.
Canada’s Unemployment Rate dipped to a 16-month low of 6.5%, which is unlikely to encourage the BoC to cut rates further.
US Retail Sales data is due on Tuesday; delayed US employment report for January will take center stage on Wednesday.

Lallalit Srijandorn FXStreet

The USD/CAD pair trades on a flat note near 1.3560 during the early European session on Tuesday. Nonetheless, a shift in the Bank of Canada (BoC) monetary policy expectations could provide some support to the Canadian Dollar (CAD) against the Greenback. Traders await the US Retail Sales data later on Tuesday, ahead of the delayed US employment report for January.

Statistics Canada revealed on Friday that Canada unexpectedly lost 24,800 jobs in January, but the losses were all part-time. However, the Unemployment Rate in Canada ticked lower to 6.5%, the lowest since September 2024, better than the expectations of 6.8%.

This report has reduced the downside risk to Canada’s growth and policy outlook, narrowing expectations for aggressive BoC easing. This, in turn, could underpin the Loonie and act as a headwind for the pair. "The loonie is finding support from resilient January labor market data," said Tony Valente, senior FX dealer at AscendantFX.

Traders will closely monitor the US employment report, which was pushed back slightly due to the recently ended four-day government shutdown. The jobs report, which will be released on Wednesday, is expected to show that Nonfarm Payrolls (NFP) rose 70,000 in January. The unemployment rate is seen as steady at 4.4% during the same period. An above-consensus NFP reading could lift the USD against the CAD in the near term.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

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.

How does inflation data impact the value of the Canadian Dollar?

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.

How does economic data influence the value of 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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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