USD/CAD: Loonie Hits Over Three-Week High as Weak U.S. Jobs Data Hurt Greenback

The Canadian dollar strengthened to over a three-week high against its U.S. counterpart on Friday after a sharp slowdown in U.S. jobs growth signalled that the Federal Reserve is likely to maintain its massive stimulus measures, sending the greenback down further.

The USD/CAD pair fell to 1.2489 today, down from Thursday’s close of 1.2551. The Canadian dollar lost about 1% in July and has further dropped over 1.2% last month.

“The markets are heading into the long weekend in North America with time to contemplate whether today’s US non-farm payrolls report is just a blip, bad or bad-bad. For stocks, “bad” can mean “good” if soft data suggest the Fed’s shift towards tapering asset purchases might be delayed. “Bad-bad” data, on the other hand,  is negative for risk assets  (and,  by virtue of its still elevated correlations with stocks and commodities, the CAD) as it suggests slower growth and, potentially, lower corporate earnings,” noted Shaun Osborne, Chief FX Strategist at Scotiabank.

Due to the COVID-19 Delta variant, hiring in the leisure and hospitality sector last month was at its lowest level in seven months. Nonfarm payrolls increased by 235,000 in August, which missed the economists’ forecast of 728,000. The Labor Department reported a drop in unemployment to 5.2% from 5.4% a month earlier.

There won’t be a tapering announcement after the job report in September. And due to this uncertainty over Fed policy, the U.S. dollar has been subdued.

The dollar index, which measures the value of the dollar against six foreign currencies, fell to its lowest level since Aug. 4, was trading 0.14% lower at 92.099. Dollar broadly weakened after Federal Reserve Chair Jerome Powell gave no indication of a tapering in a much-anticipated speech last week.

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.

“We think there is a window of opportunity for the CAD to recover a little of the ground lost ground against the USD recently in the short run. Seasonal trends suggest the CAD typically does a little better from early September through mid-October before the USD embarks on its usual turn of the year rally. Our fair value models suggest there is still a fairly significant discrepancy between the CAD’s modeled estimated fair value and spot even if background factors have turned mildly less supportive recently (lower commodity prices and less favourable spreads),” Scotiabank’s Osborne added.

“Technically, this week’s push under a range of key support points at or just below 1.26 tilts the technical outlook towards a deeper retracement of the USD’s rebound from June’s low near 1.20. We spot technical resistance now between 1.2550/60 and, stronger, at 1.2590/00. USDCAD support is 1.2478 (50% Fibonacci retracement of the 1.20/1.2950 move up) and 1.2367 (61.8% retracement). We favour looking to fade USD gains.”

Next week, the Bank of Canada will also announce its interest rate decision.

“Next week’s BoC meeting won’t result in any policy changes ahead of the federal election, but softer data of late is unlikely to alter the BoC’s course, with policy normalisation well underway. Less supportive domestic drivers (BoC repricing, political uncertainty) may keep CAD capped in September, but we expect the overvalued USD/CAD to decline in 4Q,” noted James Knightley, Chief International Economist at ING.

Canada is the world’s fourth-largest exporter of oil, which edge lower amid a slow post-hurricane recovery in Gulf Coast operations. U.S. West Texas Intermediate (WTI) crude futures were trading 0.80% lower at $69.42 a barrel. Lower oil prices lead to lower U.S. dollar earnings for Canadian exporters, resulting in a decreased value of the loonie.

On the other hand, Global demand for crude oils is declining due to recent restrictions over the Covid-19 Delta variant and a lack of buyers. The slowing Chinese economy dampened sentiment and have knocked investors off balance. As a major exporter of commodities, including oil, Canada’s dollar tends to be sensitive to the outlook for global economic growth.