Canadian Dollar Nears 16-Month High

The Canadian dollar weakened toward 1.36 per US dollar, retreating from the 16-month highs touched on January 29th, as a renewed widening in US-Canada yield differentials shifted capital back toward the greenback just as domestic data softened. Stronger-than-expected US labor figures pushed Treasury yields higher and pushed Federal Reserve easing to later in the year, reinforcing demand for dollar assets and lifting the currency’s carry appeal. In contrast, Canada’s unexpected January job loss of roughly 24,800 positions and a dip in labor force participation signaled cooling momentum at the start of the year, tempering expectations that the Bank of Canada will pivot back toward tightening. With the BoC holding its policy rate at 2.25% and offering little in the way of hawkish guidance, the relative rate outlook has tilted modestly against the loonie.

The Canadian dollar firmed toward 1.35 per US dollar, closing in on 16 month highs last seen January 29th, as resilient domestic labour conditions, firm commodity support and a shift in monetary policy expectations reduced downside risks and attracted renewed foreign inflows. January labour data pushed the unemployment rate down to 6.5%, the lowest since September 2024, while firmer full-time employment and wage growth near 3.3% weakened the case for near-term Bank of Canada easing and kept Canadian real returns comparatively attractive. At the same time, broad US dollar softness followed weaker US labour indicators and reports that Chinese regulators advised banks to curb Treasury exposure, weighing on the DXY and easing external pressure on the loonie. Meanwhile, oil prices increased, further supporting the currency by improving Canada’s terms of trade and export revenues.

The Canadian dollar strengthened toward 1.365 per US dollar, trimming losses accumulated since late January after briefly touching 16 month highs, as labour data reduced the downside risk to Canada’s growth and policy outlook, narrowing expectations for aggressive Bank of Canada easing. January labour data showed the unemployment rate falling to 6.5%, the lowest since September 2024, driven by a sharp drop in job searchers and continued resilience in full time employment, up 0.9% year-on-year. Wage growth remained firm at 3.3%, reinforcing evidence that underlying labour cost pressures have not eased and limiting the scope for rapid rate cuts. This backdrop has supported Canadian yields relative to recent expectations and helped reprice the BoC toward a slower and more cautious easing path, underpinning the currency. The loonie has also drawn support from a pause in US dollar strength following softer US labour indicators.