The Canadian Dollar (CAD) weakened against the US Dollar (USD) due to the ongoing US government shutdown which has halted economic data releases. Markets are closely watching the USD/CAD pair, now around the 1.3550 mark, as key US labour statistics, including the Nonfarm Payrolls (NFP), remain suspended until federal services resume.
The partial US government shutdown, now in its third day, has created uncertainty, forcing traders to rely on less stable private-sector data. The US Dollar Index stabilised above 97.00 following President Trump nominating Kevin Warsh as the new Federal Reserve Chairman. Meanwhile, West Texas Intermediate (WTI) Crude Oil has corrected to approximately $62.00 a barrel after geopolitical tensions eased.
Bank Of Canada Interest Rate Decision
The Bank of Canada held its interest rate at 2.25% on January 28, as Canada’s economy adjusts to slower population growth and US protectionism. Canadian GDP was stagnant in November, with manufacturing output declining by 1.3%. The absence of US data disrupts traditional market indicators, compelling traders to remain cautious until new data is available. Economic conditions such as GDP, inflation, and the price of oil remain pivotal in shaping CAD’s value, with higher oil prices and robust economic indicators generally supporting the Canadian currency.
The ongoing US government shutdown is the most important factor for us right now, as the freeze on key data like the Nonfarm Payrolls report leaves us flying blind. This uncertainty makes taking large directional bets on the US dollar very risky in the immediate term. We should therefore reduce position sizes until the US Capitol provides a clear path to resuming federal operations.
Looking back at the last major shutdown we experienced in late 2018 and early 2019, which lasted 35 days, we saw currency volatility initially fall before spiking dramatically as a resolution neared. Historical data from the CBOE shows that the FX volatility indexes for the Euro (EVZ) and Yen (JYVIX) behaved similarly during that period. This pattern suggests that the current quiet market could be an opportunity to buy cheap, longer-dated options to position for the inevitable data deluge and market reaction once the shutdown ends.
On the Canadian side, the fundamentals paint a weaker picture for the loonie. The Bank of Canada’s decision on January 28 to hold rates at 2.25% and project a sluggish 1.1% GDP growth for 2026 points to a dovish stance. This is worsened by West Texas Intermediate crude oil retreating to the low $62 per barrel range, removing a key pillar of support for the commodity-linked currency.
Impact Of US Federal Reserve Nomination
The US dollar is finding some support from the nomination of Kevin Warsh as Fed Chair, which markets see as a steadying influence. However, federal funds futures are still pricing in a greater than 60% probability of at least two rate cuts by the end of 2026, which caps the dollar’s upside potential. This tension between a stable Fed leadership and expected easing creates a difficult trading environment.
Given the technical picture, with USD/CAD finding support near 1.3540 but capped by resistance around 1.3670, the pair is likely to remain in a range. This makes selling short-dated option strangles an attractive strategy to collect premium from the expected lack of movement in the coming days. The key is to manage this position carefully, as any news of a funding deal could trigger a sharp breakout.
Therefore, our primary focus should be on volatility rather than direction. While the shutdown continues, implied volatility may remain suppressed, offering a chance to build positions that will profit from a sharp move later. We should be ready to act quickly once lawmakers reach a consensus, as the release of backlogged economic data will almost certainly trigger a significant repricing across currency pairs.
