USD/CAD shows slight increases near 1.3720 in early Asian trading. Market participants are closely watching the Federal Reserve (Fed) and Bank of Canada (BoC) as both are expected to maintain their current interest rates on Wednesday.
The BoC is anticipated to keep its rate at 2.25% due to stable inflation. Meanwhile, the Fed is grappling with concerns about central bank independence and potential changes in leadership, with President Trump expected to announce his nominee for the new Fed Chair soon.
Impact of US Government Shutdown
A looming US government partial shutdown could pressure the US Dollar against the Canadian Dollar. Chuck Schumer has announced opposition to a funding package, which risks a shutdown if unresolved by 30 January.
The Canadian Dollar, also influenced by trade conditions, might face headwinds from potential US tariff threats on Canadian products. Other key CAD drivers include interest rates, Oil prices, and economic health.
The BoC’s rates decisively impact CAD valuation. Higher interest rates typically bolster CAD, as does the price of Oil, given Canada’s role as a major exporter. Economic indicators such as GDP and employment data further influence the Canadian Dollar’s strength.
The USD/CAD pair is showing some strength, and we are watching for signals from the upcoming Federal Reserve and Bank of Canada meetings. With the Fed funds rate at 4.50% and the BoC overnight rate at 4.25%, the interest rate difference continues to favour the US dollar. Traders are pricing in a hold from both central banks, but the commentary will be key.
Canadian Dollar Support and Risks
Recent data shows US inflation remains persistent, with the last Consumer Price Index reading for December 2025 coming in at 3.1%, slightly above expectations. This supports the Fed’s “higher for longer” stance, which should keep the US dollar well-supported. In contrast, Canada’s latest inflation figure was a cooler 2.7%, giving the BoC more breathing room.
For the Canadian dollar, support is coming from crude oil prices, with WTI holding steady above $85 a barrel. However, this may not be enough to offset the pull of higher US interest rates. This dynamic creates a tense balance, with economic data likely to cause significant swings in the coming weeks.
We remember a similar period of uncertainty back in 2025, when worries about the Fed’s leadership and potential US government shutdowns created volatility. Now, with another budget deadline approaching in Washington in mid-February, those old concerns are resurfacing. Any signs of political gridlock could quickly weaken the US dollar, repeating patterns we have seen before.
Given this backdrop of policy divergence and political risk, betting on direction is difficult. Instead, traders should consider strategies that benefit from increased volatility, as implied volatility is rising with the Cboe Volatility Index (VIX) creeping up to 18. Options strategies like long straddles or strangles could be effective to capitalize on a sharp move in either direction.
While the severe tariff threats of the past have subsided under the current USMCA framework, minor trade disputes still simmer. We also know from the price shocks of 2022 and 2023 that oil prices can be unpredictable. A sudden geopolitical event could easily disrupt the current stability in energy markets, adding another layer of risk for the Canadian dollar.
