USD/CAD remains above 1.3900 as traders adopt caution amid US government shutdown risks

USD/CAD stays muted as the US government is nearing a funding freeze and possible shutdown.
President Trump warned of widespread federal job losses if Congress does not pass a funding bill.
Statistics Canada revised July GDP growth to 0.2% and reported no change in August, helping ease concerns of an economic slowdown.

Akhtar Faruqui FXStreet

USD/CAD moves little after registering losses in the previous session, trading around 1.3920 during the Asian hours on Tuesday. The pair holds steady as traders tread cautiously amid concerns that the upcoming US jobs report may not be released this week, with the government nearing a funding freeze and possible shutdown.

US President Donald Trump has warned of mass federal job cuts if Congress fails to pass a funding bill, effectively putting his own government at risk and threatening further disruptions to federal operations.

Market uncertainty increases as President Trump shared plans to impose a 100% tariff on imports of branded or patented pharmaceutical products from October 1, unless a pharmaceutical company is building a manufacturing plant in the US. Trump also unveiled tariffs of 50% on kitchen cabinets and bathroom vanities and 25% on trucks.

Statistics Canada revised July GDP growth up to 0.2% and reported flat activity in August, easing fears of an economic downturn and shifting market attention back to growth indicators.

The commodity-linked Canadian Dollar (CAD) faced challenges as the crude Oil prices fell more than 3% in the previous session after Iraq’s Kurdistan region restarted Oil exports after a 2.5-year suspension, boosting supplies in an already oversupplied market. According to the new deal, Baghdad, the Kurdistan Regional Government, and international oil companies, initial flows of 180,000–190,000 barrels per day will be shipped to Turkey’s Ceyhan port.

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

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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