USD/CAD rises as strong US PMI and falling Oil prices weigh on the Loonie

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The Canadian Dollar (CAD) extends its losses against the US Dollar (USD) on Monday, as renewed Greenback strength and falling Oil prices weigh on the commodity-linked Loonie. At the time of writing, USD/CAD is trading around 1.3676, up about 0.44% on the day.

USD/CAD climbs as broad US Dollar strength and a sharp drop in Oil prices weigh on the Canadian Dollar.
US factory activity rebounds sharply, reinforcing support for the US Dollar.
Attention turns to labour market data from both sides of the border, with US Nonfarm Payrolls and Canada’s employment report in focus.

Traders also digested the latest manufacturing Purchasing Managers Index (PMI) releases from both the United States (US) and Canada. In the US, the Institute for Supply Management (ISM) Manufacturing PMI rose to 52.6 in January from 47.9 in December, beating market expectations of 48.5.

The Employment Index improved to 48.1 in January from 44.9 previously. The New Orders Index jumped to 57.1 from 47.7, expanding for the first time since August and marking its strongest reading since February 2022. The Prices Paid Index rose to 59.0 in January, coming in below the 60.5 forecast but above the prior 58.5 reading.

At the same time, the S&P Global Manufacturing PMI edged higher to 52.4 from 51.9.

The upbeat data helped the Greenback extend its recovery, with the US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major currencies, trading near 97.62, its highest level in about a week.

Further support comes from a more hawkish Federal Reserve (Fed) outlook after US President Donald Trump nominated former Fed Governor Kevin Warsh to succeed Fed Chair Jerome Powell when his term ends in May.

Investors view Kevin Warsh as a more institutional and policy-oriented choice than other contenders, reducing fears that monetary policy could be shaped by political pressure following Trump’s repeated demands for lower rates.

On the Canadian side, the S&P Global Manufacturing PMI rose to 50.4 in January from 48.6 previously, signalling a return to modest expansion.

Commenting on the release, Paul Smith, Economics Director at S&P Global Market Intelligence, said that “following a challenging 2025, PMI data suggested that Canada’s manufacturing sector started the new year on a more positive footing. Output stabilised after nearly a full year of continuous contraction, while confidence in the outlook improved and marginal jobs growth was recorded for the first time in 12 months.”

Meanwhile, the downside in the CAD is being reinforced by softer Oil prices, as Canada is one of the world’s largest crude exporters. West Texas Intermediate (WTI) is trading around $61.78 per barrel, down more than 5.5% on the day.

Attention now shifts to labour market releases due on Friday, with both the Nonfarm Payrolls (NFP) report and Canada’s employment figures set to steer near-term price action.

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.