The Canadian Dollar regained some value against the US Dollar after a disappointing US employment report. The USD/CAD pair was at 1.3795, which shows a daily decline of about 0.5%. In July, US nonfarm payrolls increased by 73,000, falling short of the predicted 110,000. Additionally, the May and June figures were revised downwards, reducing the total by 258,000. The unemployment rate rose to 4.2% from June’s 4.1%. Market reactions included a reassessment of interest rate cuts, raising the chances of a 25 basis point cut by the Federal Reserve to 70%, up from 33% before the data release. At the same time, a new Executive Order raised tariffs on Canadian goods from 25% to 35%. Several factors affect the value of the Canadian Dollar. The interest rates set by the Bank of Canada, oil prices (Canada’s largest export), and the trade balance are all key. Higher oil prices and a positive trade balance can strengthen the CAD, while inflation can push interest rates up, encouraging foreign investment. Economic indicators, like GDP, PMIs, employment data, and consumer sentiment, also play a role. A stronger economy usually strengthens the Canadian Dollar. As of August 1, 2025, the recent US employment data creates a complex situation for the Canadian dollar. The weak US jobs report puts downward pressure on the US dollar, which is beneficial for the CAD. However, the unexpected 35% US tariff on Canadian goods poses a significant challenge for the Canadian economy. The market is aggressively anticipating a US Federal Reserve interest rate cut, with the likelihood of a September cut rising to 70%. This suggests the US economy is slowing quicker than expected, supported by June 2025 CPI data showing inflation easing to 3.1%. A dovish Fed usually negatively affects the US dollar, which could support a weaker USD/CAD exchange rate. Conversely, the new tariffs threaten Canada’s economic outlook and its largest export market. The Bank of Canada, which maintained its interest rate at 4.75% in July, now faces a tough decision between tackling domestic inflation and aiding an economy under new trade pressures. This uncertainty could weigh on the loonie in the coming weeks, limiting its strength against the US dollar. Oil prices will be a crucial factor for traders. WTI crude has remained stable around $85 per barrel, providing essential support for the Canadian currency. If oil prices hold steady or increase, it may help counter some negativity from the new tariffs. For derivative traders, this scenario indicates a period of high volatility for the USD/CAD pair. Options strategies that benefit from large price movements, like long straddles or strangles, could be successful. This approach allows traders to profit from significant shifts without having to guess whether the Fed’s weakness or Canada’s tariff woes will dominate. We saw a similar situation back in 2018 and 2019, where tariff news caused sharp, unpredictable swings in the currency. During that time, the Canadian dollar was highly influenced by political announcements, a pattern that seems to be repeating. Traders should stay agile and prepared for sudden changes based on news updates. Looking ahead, we will be monitoring for any official response from Ottawa about the tariffs. Upcoming inflation data from both countries and Canada’s own employment report for July will also be very important. These reports will provide major insights into the differing directions of the two economies.

here to set up a live account on VT Markets now