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USD/CAD exhibits volatility above 1.3700 on weak Canadian Employment

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3 months ago

August 9, 2024

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USD/CAD exhibits volatility above 1.3700 on weak Canadian Employment

USD/CAD shows volatility after a weak Employment report.
Canada’s labor market was squeezed and the wage growth measure decelerated in July.
The US Dollar declined on expectations that the Fed will cut interest rates in September.

The USD/CAD pair delivers volatile moves above the round-level support of 1.3700 after the release of the weak Canadian Employment data for July. Statistics Canada reported that the labor market unexpectedly squeezed by 2.8K. Economists expected fresh addition of 22.5K payrolls against lay-off of 1.4K workers in June. The Unemployment Rate rose steadily by 6.4% and remained lower than estimates of 6.5%.

Weak Canadian labor market data has prompted expectations of more rate cuts by the Bank of Canada (BoC). Currently, the BoC has delivered two back-to-back rate cuts by 25 basis points (bps) to 4.5% since June.

Apart from weak payrolls data, annual Average Hourly Wages, a key measure to wage growth that propels consumer spending and eventually influence price pressures, decelerated to 5.2% from the former release of 5.6%. This would also increase speculation of more BoC rate cuts.

Meanwhile, the US Dollar and bond yields have declined as investors expect that the likelihood of the Federal Reserve (Fed) pivoting to policy normalization in September appears certain. Market participants are divided about the size and how much interest rates will be reduced this year.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects from a four-day high of 103.50. 10-year US Treasury yields tumble to near 3.94%

According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that traders see a 56.5% chance that interest rates will be reduced by 50 bps in September. For the entire year, data shows a 100 bp reduction in interest rates by the Fed.

Next week, investors will focus on the United States (US) Producer Price Index (PPI) and the Consumer Price Index (CPI) data for July, which will be published on Tuesday and Wednesday. The inflation data will indicate whether current market expectations for rate cuts are appropriate.

(The story was corrected at 13:09 GMT to say in the first paragraph that “The Unemployment Rate rose steadily by 6.4%, remained lower than estimates of 6.5% not 6.4%.)

Canadian Dollar FAQs

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.