The Canadian Dollar (CAD) increased by 0.56% against the U.S. Dollar when January’s unemployment rate fell to 6.5%. This drop happened even with a loss of 25,000 jobs, as the labor force participation rate went down to 65.0%, the lowest level since early 2025. The manufacturing sector in Ontario was hit particularly hard.
The rise in CAD was supported by a weaker U.S. Dollar and a slowdown in job creation in the U.S. Meanwhile, oil prices dropped, with West Texas Intermediate (WTI) trading around $62.50. This decline was due to easing geopolitical tensions and concerns over supply from the U.S.-Iran nuclear talks.
The Bank of Canada kept its policy rate steady at 2.25%, planning to maintain this rate through 2026 unless conditions change. While the Canadian economy shows some resilience, there remains uncertainty due to the review of the Canada-U.S.-Mexico Agreement. Ongoing inflation near 2% helps support current policies to handle structural changes, especially with U.S. protectionism and demographic shifts.
Recently, the CAD’s performance saw USD/CAD fall to 1.3634. Momentum indicators, such as the Relative Strength Index, suggest that further declines may occur. Short-term support is forming near 1.36, while resistance is now around 1.37, with strong resistance from moving averages above current levels.
The CAD’s recent strength might be misleading, presenting a potential opportunity for traders. The unemployment rate dropping to 6.5% does not reflect a strong economy, but rather a significant number of people leaving the workforce, which obscures a net loss of 25,000 jobs. This points to underlying weaknesses that the headline figure does not capture.
The jobs report raises concerns, especially with 28,000 manufacturing jobs lost. This aligns with recent S&P Global Canada Manufacturing PMI data from late 2025, which showed the sector was in contraction for several months, remaining below the 50.0 mark. This indicates real economic challenges due to U.S. tariff pressures and decreasing demand.
The CAD’s rise mainly reflects U.S. Dollar weakness rather than Canadian strength. The market has reacted to a recent increase in U.S. jobless claims to 231,000 and to the highest number of corporate job cuts in January since 2009. This has increased expectations that the Federal Reserve will start cutting interest rates by June.
With the Bank of Canada keeping its rate at 2.25% through 2026, the divergence in policy with a likely rate-cutting Fed should eventually benefit the U.S. Dollar. Additionally, crude oil prices near $62.50 add pressure on Canadian export revenues. A similar situation occurred in late 2023, where oil prices below $70 limited CAD gains even when other factors were favorable.
For those trading derivatives, the recent dip in USD/CAD towards the 1.3600 support level seems like a good chance to position for a rebound. We suggest selling out-of-the-money puts on USD/CAD with a strike around 1.3500 as a strategy to collect premium, betting that this support will hold. A more direct bullish approach might involve buying call options with strikes near 1.3700, expecting a return to an overall upward trend.
here to set up a live account on VT Markets now
