USD/CAD drifts lower from 1.3700 with all eyes on the US-China talks
- The US Dollar is trimming gains, with investors hopeful about the trade talks between the US and China.
- - Friday’s data revealed that the US labour market remains tight.
- - Canada’s payrolls data was mixed, with the Unemployment rate rising to pandemic levels.
The US Dollar is trading lower across the board on Monday, as the dust from the strong US Nonfarm Payrolls report settles, and investors shift their focus to the trade negotiations between the US and China, which are taking place in London later on Monday.
Negotiators from the world’s two major economies are trying to ease the recent trade tensions and get back on the track defined last month in Geneva. Those talks led to a significant reduction of their reciprocal tariffs, which was celebrated by the market. The mood is mildly positive today, yet traders are growing cautious about the US Dollar.
The USD appreciated following Friday’s US jobs data
The US Dollar jumped on Friday as a large-than-expected increase in May¡’s Nonfarm Payrolls eased concerns about an economic slowdown triggered by soft business activity reports and a grim ADP Employment reading.
The US economy created 139,00 new jobs in May, beating expectations of a 130,000 reading. The Unemployment Rate remained steady at 4.2%, with wage growth steady at 3.7%. All in all, figures that reflect a tight labour market and endorse the Fed’s view that there is no rush to cut interest rates further.
In Canada, jobs data revealed a net increase of 8.8K on May’s employment figures, following a 7.4K decline in April. These figures beat expectations of a 15K decline, but the optimism was dampened by an increase in the jobless rate, which ticked up to 7%, from 6.9%, hitting its highest levels since the pandemic. The Canadian Dollar retreated after the data release.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
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