Canadian Dollar loses ground even as the US Dollar Index falls

• USD/CAD reverses earlier losses as the Canadian Dollar comes under pressure from falling Oil prices.
• Weak Canadian employment data raises doubts over the BoC's ability to tighten further.
• Strong US jobs data keeps December Fed rate hike expectations firmly in place.

USD/CAD attracts buyers during Monday’s American trading hours after spending much of the day in negative territory. The Canadian Dollar (CAD) faces a double headwind as Oil prices fall and the Bank of Canada (BoC) grapples with a difficult balancing act between containing inflation and supporting a weakening labour market.

At the time of writing, USD/CAD trades around 1.4131 after hitting an intraday low of 1.4077. The pair rebounds even as the US Dollar Index (DXY) falls 0.45% on the day.

West Texas Intermediate (WTI) closed roughly 12% lower last week and is down more than 3% on the day. Canada is a major crude exporter, leaving the Loonie sensitive to Oil price movements.

Democrats’ victory in the US midterm elections helped drive last week’s sell-off in crude, as traders bet that Congress would press President Donald Trump to end the war with Iran. Oil extends its decline on Monday after Trump played down the likelihood of renewed strikes. Qatar’s prime minister is in Washington, DC, for talks with Trump and Vice President JD Vance on efforts to end the conflict.

Even after the drop, crude remains above pre-war levels, keeping inflation risks tilted to the upside. Prices could rise again if talks stall or tensions escalate.

A third month of job losses complicates the BoC’s next move

Canada lost jobs for a third straight month in October, according to data released by Statistics Canada on Friday. Employment fell by 4.7K against expectations for a gain of 13.6K, following declines of 68.3K in September and 41.7K in August. The Unemployment Rate rose to 6.7% from 6.5%.

The BoC raised its policy rate by 25 basis points to 2.50% in October and signalled that further increases might be needed to keep higher energy costs from feeding into broader inflation. The weak jobs report makes that call harder. Persistent inflation keeps another hike in play, but a softer labour market gives policymakers a reason to wait.

A hawkish Fed poses another hurdle for the Canadian Dollar

US Nonfarm Payrolls (NFP) rose by 165K in October, more than double the 65K forecast, while the Unemployment Rate edged down to 4.1%. A firm labour market gives the Federal Reserve (Fed) room to raise rates as it works to bring inflation back to 2%. Traders price in roughly an 80% chance of a December hike, according to the CME FedWatch Tool.

Richmond Fed President Thomas Barkin said on Monday that the US economy was “remarkably stable” and that the direction of monetary policy was “straightforward,” though it was best to move “with care.” He added that the main risk to the Fed’s mandate was on the inflation side.

Tuesday’s US Consumer Price Index (CPI) could shift expectations for a December Fed rate hike and drive the US Dollar’s next move. A hotter-than-expected reading could strengthen the case for another hike and lift the US Dollar, while a softer print could help the Canadian Dollar regain ground.