Canadian Dollar jumps after North American jobs double surprise

• USD/CAD falls 0.53% to 1.3940 after a much weaker-than-expected US employment report.
• US payrolls turn negative in July, while sharp downward revisions to previous months deepen concerns over the labor market.
• The Canadian Dollar is supported by stronger-than-expected employment data and a lower unemployment rate.

USD/CAD declines sharply on Friday, trading around 1.3940 at the time of writing, down 0.53% on the day, hitting its lowest level since June. The pair remains under pressure after the release of a much weaker-than-expected US employment report, while Canadian data provides additional support to the Canadian Dollar (CAD).

The US Bureau of Labor Statistics (BLS) reported that Nonfarm Payrolls (NFP) fell by 23K in July, compared with market expectations for an increase of 80K. Revisions were also particularly significant, with Juen and May payrolls revised down by a combined 103K jobs. Despite this sharp deterioration, the Unemployment Rate edged down to 4.1% from 4.2%, while annual Average Hourly Earnings growth slowed to 3.2%, adding to evidence that the US labor market is gradually cooling.

Following the release, the US Dollar (USD) weakened sharply as investors scaled back expectations for monetary tightening by the Federal Reserve (Fed). According to the CME FedWatch Tool, the chance of a 25-basis-point rate hike at the September meeting fell to 42%, down from 55% a day earlier. Markets, however, continue to price in a high chance of at least one rate hike before the end of the year.

Comments from Fed Richmond President Thomas Barkin failed to support the Greenback. Barkin said the latest employment figures point more to a labor market characterized by low hiring and low firing than to an outright deterioration. He nevertheless noted that corporate earnings remain strong and that he is monitoring whether they eventually feed through to the labor market.

The Canadian Dollar also draws support from upbeat domestic data. Statistics Canada reported that the Unemployment Rate fell to 6.4% in July, below market expectations. Employment increased by 75.1K jobs, comfortably beating forecasts of 15K, while the Labor Force Participation Rate rose to 65.1%. These figures strengthen the Canadian currency and add further downside pressure on USD/CAD.

Other Canadian data released on Friday was more mixed. The Ivey Purchasing Managers Index (PMI) eased to 55.1 in July from 56.2 in June, missing market expectations of 55.5. Despite the softer-than-expected reading, the indicator remains comfortably above the 50 threshold, signaling continued expansion in business activity. However, the weaker PMI had little impact on the Canadian Dollar, as markets remained primarily focused on the stronger-than-expected employment report, which continued to underpin the Loonie.

USD/CAD slips below support as market awaits US CPI test for Fed pricing

According to TD Securities, the latest payrolls releases triggered a notable move in FX markets, with "payrolls data broke USD/CAD below 1.40," as contrasting US and Canadian outcomes drove a sharp reaction. The firm argues that the move has underscored that "the sharp USD/CAD reaction to the contrasting payroll outcomes suggests the market remains focused on both central-bank divergence and Canada's domestic outlook."

On the Canadian side, TD notes that "recent developments in the Canadian economy have evolved broadly in line with our forecasts," and that the data surprise was sufficient to "briefly pushing USD/CAD below the 1.40 support level." However, the team cautions that "we think the bearish USD momentum may not sustain unless US CPI also surprises lower to allow market to price out near-term Fed rate hiking odds." In their view, "sustained USD weakness will likely require softer US CPI," with "next week's US CPI report" flagged as "the next major test for near-term Fed rate hike pricing."

USD/CAD technical analysis

In the four-hour chart, USD/CAD trades at 1.3943, extending its retreat below the 100-period simple moving average (SMA) at 1.4057 and the 200-period SMA at 1.4119, which keeps the near-term bias bearish. The downward resistance trend line, now projected from the 1.4241 area with a break reference near 1.4072, reinforces the overhead supply together with the horizontal barrier at 1.4000, while the Relative Strength Index (RSI) slipping to 28 suggests the pair is entering oversold territory but not yet showing a clear reversal signal.

On the topside, initial resistance is seen at the 1.4000 horizontal line, followed by the 100-period SMA at 1.4057 and the descending trend-line reference near 1.4072, with the 200-period SMA at 1.4119 acting as a broader cap if a rebound extends. On the downside, the immediate focus sits on the horizontal support at 1.3900, where a decisive break would open the way for further losses, while holding above this floor would allow for a corrective bounce within the prevailing bearish structure.

(The technical analysis of this story was written with the help of an AI tool. Know more.)