Canadian Dollar weakens ahead of US, Canadian jobs data releases
- USD/CAD gathers strength to near 1.4050 in Friday’s early European session.
- Safe-haven flows and a cautious mood support the US Dollar.
- Traders brace for the US and Canadian employment reports later on Friday.
The USD/CAD pair gains momentum to around 1.4050 during the early European trading hours on Friday. The US dollar (USD) edges higher against the Canadian Dollar (CAD) on safe-haven demand after the US equity sell-off. Markets might turn cautious later on Friday ahead of the employment data from the US and Canada.
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Traders will closely monitor the US jobs report for more clues about the US interest rate outlook. Economists expect a Nonfarm Payrolls (NFP) gain of 65,000 in October, up from 29,000 in September. The Unemployment Rate is projected to hold at a very low 4.2% rate.
If the reports show stronger-than-expected outcomes, this could reinforce the case for US rate hikes and underpin the Greenback. On the other hand, any signs of weakening in the US labor market could drag the USD lower in the near term.
"Recent data suggests improvement in the labour market, and we expect that to continue with this report," said MUFG analysts, referring to the NFP data.
On the Canadian front, markets expect the Canadian economy to claw back some losses in October, with the consensus projecting a modest job gain of 13,600. The Unemployment Rate in Canada is projected to stay unchanged at 6.5% in October.
Loonie gains but Scotiabank flags fragile fundamentals and USD/CAD support
Analysts at Scotiabank note that while the Canadian Dollar has firmed, “the loonie’s relative performance is somewhat more underwhelming when compared to its peers, and highlights its role as a lower-beta risk and commodity currency.” They add that “the CAD’s strength is notable nonetheless, and threatening to deliver fresh local highs as it retraces its selloff from early September,” but caution that the move is not fully backed by underlying drivers.
Scotiabank stresses that “we are somewhat cautious however, given the renewed CAD-negative widening in US-Canada yield spreads, and note that recent CAD strength has not been confirmed by fundamentals.” From a technical standpoint, they describe their stance as “bearish/neutral,” observing that “the latest decline in USD/CAD looks to be struggling to extend much below the mid-1.39s, and the RSI has steadied in the low 30s.” The bank says “we continue to look to near-term support in the 1.3900/1.3920 area and see resistance above 1.4000,” and highlights that “our FV estimate has climbed over the past few sessions and is currently at 1.4119,” underscoring a degree of misalignment between spot pricing and their fair value model.
Technical Analysis: USD/CAD holds a neutral bias in the near term
In the daily chart, USD/CAD hovers just above the 100-day simple moving average (SMA) but still below the 20-day Bollinger middle band, which leaves the near-term bias broadly neutral and range-bound. Price action suggests the pair is stabilizing after its recent pullback from the upper Bollinger band, while the Relative Strength Index (RSI) at roughly 49 reinforces a lack of directional conviction, hinting that neither bulls nor bears currently hold a decisive edge.
On the topside, initial resistance is seen at the Bollinger middle band around 1.4065, and a daily close above this level would open the door for a retest of the upper band near 1.4255. On the downside, immediate support is provided by the 100-day SMA at 1.4045, with a break below exposing the lower Bollinger band zone around 1.3881, where buyers could look to defend the broader range floor.
(The technical analysis of this story was written with the help of an AI tool. Know more.)
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.