The Canadian Dollar (CAD) rose by 0.56% against the U.S. Dollar after a drop in January’s unemployment figures to 6.5%. This decline occurred despite job losses of 25,000, as labour force participation reduced to 65.0%, its lowest since early 2025, particularly affecting manufacturing jobs in Ontario.
The CAD’s rise was influenced by a weakened U.S. Dollar and reduced job creation in the U.S. Alongside, oil prices faced declines, with West Texas Intermediate (WTI) prices near $62.50 due to eased geopolitical tensions and supply concerns following Iran-US nuclear talks.
Bank Of Canada’s Policy
The Bank of Canada held its policy rate at 2.25%, maintaining this through 2026 unless conditions change. The Canadian economy displays resilience, yet uncertainty due to the Canada-US-Mexico Agreement review persists. A persistent inflation rate near 2% supports the current stance to navigate structural transitions, considering US protectionism and demographic shifts.
The CAD’s recent performance saw USD/CAD pulling back to 1.3634. Momentum indicators like the Relative Strength Index suggest further downside. While short-term support is building near 1.36, resistance now lies near 1.37, with significant resistance from moving averages above current levels.
The recent strength in the Canadian Dollar is deceptive and we believe it presents an opportunity. The drop in the unemployment rate to 6.5% was not due to a strong economy, but rather a significant number of people leaving the workforce, masking a net loss of 25,000 jobs. This suggests underlying weakness that the headline number fails to capture.
We see the details of the jobs report as concerning, especially the 28,000 positions lost in manufacturing. This trend is consistent with recent S&P Global Canada Manufacturing PMI data from late 2025, which showed the sector remained in contraction territory below the 50.0 mark for several consecutive months. This confirms that US tariff pressures and slowing demand are creating real economic pain.
US Dollar Weakness
The Loonie’s advance was primarily a story of US Dollar weakness, not Canadian strength. The market is reacting to a recent spike in US jobless claims to 231,000 and data showing announced corporate job cuts in January were the highest for that month since 2009. This has accelerated bets that the Federal Reserve will begin cutting interest rates by June.
With the Bank of Canada holding its policy rate steady at 2.25% through 2026, the policy divergence between it and a potentially rate-cutting Fed should favor the US Dollar over time. Furthermore, crude oil is offering no help, with WTI prices languishing near $62.50, a level that puts pressure on Canadian export revenues. We saw a similar dynamic in late 2023, where oil prices below $70 capped CAD rallies even when other factors were supportive.
For derivatives traders, this dip in USD/CAD towards the 1.3600 support level looks like a chance to position for a rebound. We think selling out-of-the-money puts on USD/CAD with a strike around 1.3500 could be a viable strategy to collect premium, betting that this floor will hold. A more direct bullish view could be expressed by buying call options with strikes near 1.3700, anticipating a return to the broader uptrend.
