USD/CAD strengthens above 1.4000 as US advances shutdown deal
- USD/CAD gains traction to around 1.4035 in Tuesday’s early European session.
- The US Senate passed a funding bill that could end the shutdown within days, supporting the US Dollar.
- Canada's job market posted a surprise expansion in October, reinforcing BoC’s rate hold.
The USD/CAD pair gathers strength to near 1.4035 during the early European session on Tuesday. Hopes of an end to the longest government shutdown in history provide some support to the US Dollar (USD) against the Canadian Dollar (CAD). Traders await the US ADP Employment Change weekly report, which is due later on Tuesday.
The US Senate has passed amended funding legislation that moves the country's government one step closer to ending its federal shutdown. The bill will head to the House of Representatives for final approval. If it passes in both chambers of Congress, it will head to US President Donald Trump to be signed into law. Trump late Monday voiced support for a bipartisan agreement to end the US shutdown.
On the other hand, the upbeat Canadian employment data might cap the downside for the Loonie. Statistics Canada reported on Friday that the Unemployment Rate ticked down to 6.9% in October from 7.1% in the previous month, better than the 7.1% expected. Additionally, the Canadian economy added 66,600 jobs in October, marking a second consecutive month of surprise employment gains.
“This report will make the Bank of Canada more comfortable to sit on the sidelines and let the 275 basis points of rate cuts in this cycle work their way through the economy,” Leslie Preston, managing director and senior economist at Toronto-Dominion Bank, said in a report to investors.
The Bank of Canada (BoC) survey of market participants showed that many expect the rate to hold at 2.25% until at least mid-2027. However, other economists are divided, with some anticipating another reduction early in 2026, depending on how trade issues evolve.
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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