Insights 
VT 
The Canadian Dollar (CAD) remained near 1.3900 against the US Dollar (USD) as markets await US-China trade talks in Switzerland. Canadian labour data showed steady wage growth and slightly better-than-expected job additions in April, though the unemployment rate rose to 6.9% from 6.7%.
This week, USD/CAD climbed above 1.3900 due to Loonie weakness, pausing at 1.3930. Canadian economic data takes a backseat next week with US inflation data in focus. Despite better employment figures, the rise in unemployment balanced out positive effects.
Key Influences on the Canadian Dollar
Key factors influencing the Canadian Dollar include interest rates set by the Bank of Canada (BoC), oil prices, the economy’s health, and the Trade Balance. The US economy also plays a role due to the countries’ trade relations.
The BoC influences the CAD by adjusting interest rates aiming to maintain inflation within 1-3%. Higher interest rates are typically CAD-positive. Oil prices impact the CAD, as rising oil prices often lead to a stronger currency. Inflation can strengthen the CAD by prompting higher interest rates. Economic data like GDP and manufacturing indices also affect the CAD, with strong figures supporting a stronger currency.
With the USD/CAD pair hovering just above the 1.3900 level, recent market activity continues to underscore the delicate equilibrium between domestic indicators and broader international forces. Labour statistics published in Canada last week offered a mixed bag of information: while wages persisted in ticking upward and job creation slightly exceeded expectations, the concurrent uptick in the unemployment rate from 6.7% to 6.9% added a layer of complexity. This sort of contradiction tends to muddy directional conviction and casts some doubt on the robustness of the job market, raising questions about the sustainability of wage growth without firmer hiring trends.
Markets have largely shrugged off Canadian data in favour of developments elsewhere—namely potential shifts in US monetary policy and the impact of ongoing discussions between the US and China, currently slated for further talks in Switzerland. This is nothing new; when high-impact US indicators loom, especially inflation prints, they often take precedence due to their implications for broader dollar movement. And in this scenario, the Loonie is more often acted upon than acting.
Looking at the current interest rate environment, the Bank of Canada’s monetary stance plays an obvious role: reminders of their inflation target range of 1–3% are not simply academic. When inflation pressures start leaning toward the upper bound, rate adjustments often follow. These decisions then echo into currency markets, with the potential to either lift or weigh down CAD valuations, depending on the degree of hawkishness perceived.
Oil Prices and Trade Data Effects
When we observe oil’s behaviour, which remains a key export for Canada, it adds another dimension. There’s a tendency for the CAD to strengthen when oil prices climb, driven by increased revenues flowing into the country. However, volatility in the energy sector means such strength can be short-lived. A stabilisation or moderate increase in crude could support the currency, but steep drops—especially if paired with weak macro data—tend to trigger selling pressure.
Trade data continues to underpin general confidence, or the lack thereof, in Canada’s broader economic narrative. A surplus can bolster the currency through increased demand for Canadian dollars, while recurring deficits might do the opposite. As we move into the next phase of the month, any deviation in those figures—particularly with US inflation data expected—could ripple into positioning shifts among investors.
We’re watching bond yield differentials closely, especially between Canadian and US government debt instruments. When US yields rise more steeply than their Canadian counterparts, which has been the case recently, the differential attracts flows into the USD. This puts further topside pressure on USD/CAD—moving it towards the 1.4000 level unless counteracted by strong domestic news, or a change in sentiment around Federal Reserve policy.
Going forward, it’s worth maintaining flexibility in positioning, rather than anchoring opinions purely to domestic data. Traders would do well to anticipate a scenario where US inflation hits on the higher end of expectations, potentially triggering a repricing of short-term rate forecasts. Should this happen while Canadian data remains mixed or neutral, upward momentum in USD/CAD may persist in the short run. An aligned recalibration of BoC rate expectations may be needed to reverse that trend.
Wider risk sentiment, especially in relation to global trade policies, will also play a part. Should talks between Washington and Beijing produce a friendly tone—or even just the promise of stability in bilateral relations—risk appetite could improve. In such a case, the Loonie may benefit indirectly, although any boost would be tempered if US dollar demand remains elevated due to economic outperformance south of the border.
For upcoming positioning, the path of least resistance seems skewed toward USD strength unless clear, consistent data from Canada pushes back against that thesis. As such, traders should keep a close eye on both inflation readings and oil inventories, as well as manufacturing and services indicators in both countries.
Flexibility and responsiveness to incoming data, especially US CPI and any commentary from BoC officials ahead of their next meeting, will be key. The lead-up to those events may carry some choppiness, but within that lies opportunity—particularly for those able to identify when sentiment begins to shift before price fully reflects it.
