USD/CAD is slightly up around 1.3720 during early Asian trading. Traders are closely monitoring the Federal Reserve (Fed) and the Bank of Canada (BoC) as both are likely to keep their interest rates unchanged on Wednesday. The BoC is expected to hold its rate at 2.25% because inflation remains stable. On the other hand, the Fed is dealing with worries about its independence and possible leadership changes, as President Trump is expected to announce a new nominee for Fed Chair soon.

Impact of US Government Shutdown

A potential partial shutdown of the US government could weaken the US Dollar against the Canadian Dollar. Chuck Schumer has opposed a funding plan that could lead to a shutdown if no resolution is found by January 30. The Canadian Dollar might also be affected by trade conditions, especially from US tariff threats on Canadian goods. Other important factors impacting the CAD include interest rates, oil prices, and the overall economic situation. The BoC’s rates play a significant role in determining CAD’s value. Generally, higher interest rates support a stronger CAD, as do rising oil prices, since Canada is a major oil exporter. Economic indicators like GDP and employment data also have a strong influence on the strength of the Canadian Dollar. The USD/CAD pair is showing some strength, and we await insights from the upcoming meetings of the Federal Reserve and the Bank of Canada. The Fed’s funds rate stands at 4.50%, while the BoC’s overnight rate is 4.25%, making the interest rate gap favor the US dollar. Traders expect both banks to maintain their current rates, but the accompanying commentary will be crucial.

Canadian Dollar Support and Risks

Recent data indicates persistent inflation in the US, with the latest Consumer Price Index for December 2025 at 3.1%, slightly above expectations. This supports the Fed’s stance for prolonged higher rates, keeping the US dollar strong. Meanwhile, Canada’s recent inflation figure was a lower 2.7%, giving the BoC some flexibility. The Canadian Dollar gains support from rising crude oil prices, with WTI remaining above $85 per barrel. However, this may not be enough to counteract the effect of higher US interest rates. This situation creates a delicate balance, and upcoming economic data may lead to significant fluctuations in the coming weeks. We recall a similar period of uncertainty in 2025 when fears about the Fed’s leadership and potential US government shutdowns led to market volatility. As another budget deadline approaches in mid-February, these old concerns are becoming relevant again. Any signs of political stalemate could quickly weaken the US dollar, echoing past patterns. Given this environment marked by differing policies and political risks, making directional bets is challenging. Traders might benefit from strategies that capitalize on increasing volatility, as the Cboe Volatility Index (VIX) rises to 18. Options strategies like long straddles or strangles could effectively take advantage of sharp moves in either direction. While the severe tariff threats of previous years have eased under the current USMCA framework, minor trade disputes remain. Additionally, we know from the price shocks of 2022 and 2023 that oil prices can be volatile. A sudden geopolitical event could disrupt the energy market stability, adding another layer of risk for the Canadian dollar. Create your live VT Markets account and start trading now.

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