USD/CAD: Loonie Gains After Solid Jobs Report Leaves BoC on Track to Taper

The Canadian dollar strengthened against its U.S. counterpart for the second straight session on Friday after an upbeat August jobs report puts the Bank of Canada on track for another taper next month.

The USD/CAD pair fell to 1.2578 today, down from Thursday’s close of 1.2662. The Canadian dollar lost over 1.2% last month and has depreciated about 0.2% so far this month.

In August, Canada added 90,200 jobs, and the unemployment rate fell to 7.1%, its lowest level since the COVID-19 pandemic began. The data might support the Bank of Canada’s next taper in October.

The Governor of the Bank of Canada, Tiff Macklem, said yesterday that Canada is on its way to no longer needing quantitative easing to stimulate the economy.

On Wednesday, the Bank of Canada held its key interest rate, citing fears that the pandemic and supply bottlenecks might stall the economic recovery. The central bank has maintained its overnight rate target at 0.25% and said it will continue buying bonds at a rate of $2 billion a week as part of its quantitative easing program.

“There is some progress and we think the data should offset a lot of the concern about the Bank’s policy stance following the weak Q2 GDP data and should provide some additional lift for the CAD via some stabilization (or re-widening) in short-term US-Canada spreads that have moved against the CAD in recent weeks,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

“Technical signals are mixed, reflecting some of the choppy trade seen in the past few weeks.  The USD retains a fair degree of bullish trend momentum on the daily and weekly DMI oscillators but the longer run charts also reflect persistent USD selling pressure on strength over the past two months and spot has pressure daily support (40-day MA) at 1.2593 into the end of the week.  A clear push below this point is needed to unlock more USDCAD weakness towards 1.2500/10 and, potentially, the low 1.24 zone (early August low at 1.2424).”

Canada is the world’s fourth-largest exporter of oil, which edge higher on low U.S. output after Hurricane Ida. U.S. West Texas Intermediate (WTI) crude futures were trading 2.22% higher at $69.65 a barrel. Higher oil prices lead to higher U.S. dollar earnings for Canadian exporters, resulting in an increased value of the loonie.

The dollar index, which measures the value of the dollar against six foreign currencies, was trading 0.01% higher at 92.487. After news that Chinese President Xi Jinping and US President Joe Biden talked for the first time in seven months, pro-growth currencies gained, weakening the greenback.

However, it is highly likely that the world’s dominant reserve currency, the USD, will rise by end of the year, largely due to the expectation of two rate hikes by the Fed in 2023. With the dollar strengthening and a possibility that the Federal Reserve will raise interest rates earlier than expected, the USD/CAD pair may experience a rise.