USD/CAD: Loonie Falls as U.S. Dollar Gains on Strong Jobs Data

The Canadian dollar depreciated against the U.S. dollar on Friday as strong U.S. jobs data boosted the greenback, while weak oil prices and disappointing domestic employment data added to the decline.

Today, the dollar to loonie conversion rose to 1.2579, up from Thursday’s close of 1.2507. The Canadian dollar had lost about 1% in July – the second biggest monthly drop since September 2020 and has weakened about 0.9% so far this month.

“The problem for the CAD over the week ahead is that, with the domestic calendar bereft of any data releases, markets are more likely to focus on the solid US jobs report and how that reinforces the Fed taper narrative.  We expect the USD to remain broadly better supported in the coming week, putting a little more focus on the topside of our estimated 1.2440/1.2620 range, even with the CAD still appearing quite undervalued from a fundamental point of view,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“The charts are flashing some mixed signals across varying timeframes that reflect some of the broader uncertainties and weak conviction around trends.  On the weekly chart, the USD is consolidating the tumble off the late July high that really should have produced a bit more downside pressure on spot, in our opinion. Shorter-term charts suggest some upward pressure building on USDCAD. USDCAD pushing through 1.2550/60 later today or early next week will put spot on course to retest the low-1.27s.  Key support now is 1.2475 and 1.2440/50.”

The dollar index, a measurement of the dollar’s value relative to six foreign currencies, was trading 0.61% higher at 92.811 – not far from this year’s high of 93.437.

The U.S. dollar gained versus a basket of currencies on Friday after the world’s biggest economy added 943,000 Jobs last month and its jobless rate declined to 5.4%, suggesting that the monetary policy tightening will be coming soon.

The greenback was also supported by hawkish remarks from the US Federal Reserve which led markets to move forward with expectations of policy tightening. Richard Clarida said Wednesday that policy conditions could be met for an interest rate hike by late 2022, putting a move in early 2023 on track, according to Reuters.

Reuters reported that he and three other Fed members also hinted at cutting back on bond-buying in the near future, depending on what happens with the labour market.

The risk that the world’s dominant reserve currency, the USD, rise further over the coming year is high, largely driven by the Fed’s expectation of two rate hikes in 2023. A strengthening dollar and growing risk that the Federal Reserve would tighten its monetary policy earlier than expected would push the USD to CAD pair higher.

Canada is the world’s fourth-largest exporter of oil, which edged lower on higher inventory and on rising concern that the new delta variant will derail the global economic recovery.

U.S. West Texas Intermediate (WTI) crude futures were trading 0.84% lower at $68.6 a barrel. High oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

As of July, the labour market added 94,000 jobs in the country, which was less than expectations of 177,500, though they mostly accounted for full-time employment. Data from Statistics Canada indicate that unemployment rates dropped to 7.5%, 0.2 points below expectations of 7.4%.