USD/CAD extends losses as weak US labor data boosts Fed cut expectations
- The Canadian Dollar strengthens as the US Dollar weakens on soft labor market data.
- ADP data show an average loss of 11,250 US private-sector jobs, fueling Fed rate-cut bets.
- The US Dollar Index trades near a two-week low as markets price in a 70% chance of a December cut.
The Canadian Dollar strengthens against the US Dollar (USD) on Tuesday, with USD/CAD reversing earlier gains as the Greenback weakens following soft labor market data. At the time of writing, the pair is trading around 1.4008, hovering near two-week lows.
Data from ADP showed that the United States lost an average of 11,250 private-sector jobs in the four weeks ending October 25, compared with 14,250 previously. The weak figures added to concerns about the labor market’s resilience and fueled expectations for further monetary policy easing by the Federal Reserve (Fed).
The US Dollar Index (DXY), which tracks the Greenback against a basket of six major currencies, trades near 99.30, marking its fifth consecutive daily decline. According to the CME FedWatch Tool, markets are now pricing in nearly a 70% probability of a rate cut in December, up from 62% a day earlier.
However, the latest figures contrast with last week’s data. The ADP Employment Change report showed that US private payrolls rose by 42,000 in October, exceeding market expectations for a 25,000 gain and reversing the 29,000 decline reported in September. In the same period, the Challenger Job Cuts report revealed that US employers announced 153,074 job cuts in October, the highest monthly total since 2003.
This divergence between private-sector employment data and job cuts highlights the uneven nature of recent US labor indicators and keeps investors cautious as they await official labor market data.
At the same time, optimism over a resolution to the record-long US government shutdown after the Senate voted 60-40 on Monday to approve a temporary funding bill has provided little support to the Greenback. The deal, which keeps the government funded until January 30, eases short-term uncertainty but deepens fiscal concerns as debt levels continue to rise.
With delayed US economic data releases expected to resume soon, investors fear that further signs of weakness could reinforce the case for additional Fed easing.
On the Canadian side, firm Oil prices and resilient domestic data are helping underpin the Loonie. West Texas Intermediate (WTI) Crude Oil, Canada’s largest export, is up more than 1% and trades around $60.74, providing support to the commodity-linked currency. In addition, last week’s stronger-than-expected labor market data reinforce expectations that the Bank of Canada (BoC) will keep policy steady following its recent rate cut.
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.
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