USD/CAD trades higher in thin holiday liquidity, Canada CPI eyed

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The Canadian Dollar (CAD) remains on the back foot against the US Dollar (USD) on Monday, with USD/CAD extending its advance for a fourth consecutive day as the Greenback steadies following its recent weakness. At the time of writing, the pair is trading around 1.3628.

USD/CAD trades higher, underpinned by a firm US Dollar.
Thin liquidity due to the US President’s Day keeps price action range-bound.
Traders await Canada CPI for fresh guidance on the BoC’s monetary policy path.

Price action could remain choppy in thin liquidity conditions due to the US President’s Day holiday and Canada’s Family Day, with market focus shifting to Canada’s January inflation data due on Tuesday.

Economists expect the monthly Consumer Price Index (CPI) to rise 0.1% in January, after contracting 0.2% in December. On an annual basis, headline CPI is forecast to hold steady at 2.4%, unchanged from the previous month. A firmer-than-expected print could strengthen the case for the Bank of Canada (BoC) to keep interest rates on hold for longer.

At its January meeting, the Bank of Canada said monetary policy remains focused on keeping inflation close to the 2% target. The Governing Council judged that the current policy rate “remains appropriate,” while warning that the Canadian economy continues to face headwinds from elevated trade uncertainty linked to US tariffs.

Meanwhile, firm Oil prices are lending modest support to the Loonie, given Canada’s status as a major crude exporter. West Texas Intermediate (WTI) is trading around $63.25, up nearly 1.0% on the day.

In the United States, near-term Federal Reserve rate-cut expectations have faded after last week’s labor market data showed conditions stabilising. Nonfarm Payrolls rose by 130K, rebounding from 48K previously, while the Unemployment Rate eased to 4.3% from 4.4%.

At the same time, softer-than-expected inflation data has kept hopes alive for policy easing in the second half of the year, with traders still pricing in more than 50 basis points (bps) of rate cuts in 2026. Headline CPI rose 0.2% MoM in January, slowing from 0.3% in December. On an annual basis, inflation eased to 2.4% YoY from 2.7%.

Diminishing expectations of Fed easing have helped stabilise the Greenback. The US Dollar Index (DXY), which tracks the Greenback's value against a basket of six major peers, is hovering around the 97.00 mark, oscillating within a one-week trading range.

However, structural headwinds such as US President Donald Trump’s aggressive trade policies, repeated criticism of the Federal Reserve, and rising government debt continue to weigh on sentiment, limiting any meaningful recovery in the US Dollar.

Attention now turns to the Federal Open Market Committee (FOMC) meeting minutes on Wednesday, followed by the Core Personal Consumption Expenditures (PCE) Price Index and the advance estimate of fourth-quarter Gross Domestic Product (GDP) on Friday, for further clues on the timing of the next interest rate cut.

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.