The USDCAD has been trading pretty much sideways since the dual Fed and BOC meetings late last month. The dearth of data from the US due to the government shutdown has left traders somewhat in limbo. That means the currency pair now has to rely on data from the Canadian side to move, and the upcoming jobs figures could do just that.
Given the volume of trade between the US and Canada, the continued trade war between them has become the most important factor for monetary policy and currency performance. Canadian Prime Minister Mark Carney was in Washington trying to get some headway in trade negotiations but hasn’t made much progress.
What the Market is Looking For
The consensus among analysts is that Canada’s September unemployment rate will tick up to 7.2% from 7.1% in August. That’s despite expectations that the economy added 7.5K jobs, compared to -65.5 a month earlier.
Canada’s high unemployment rate and sputtering economy are anticipated to keep the BOC in an easing stance. Governor Tiff Macklem has repeatedly said that his primary concern is the tariffs between the US and Canada, which are putting downward pressure on the economy. Monetary policy would likely shift if a trade deal is reached between Ottawa and Washington.
How the Market Could React
At its last meeting, the BOC cut rates amid the economic situation and high unemployment, giving the impression that further easing was on the horizon. At the same time, the Fed also cut rates, which evened out the interest rate gap between the two currencies. Markets are also expecting both the Fed and the BOC to cut rates again at their respective meetings at the end of the month.
With interest rates following similar paths, market focus will likely shift more toward economic performance. Cross-border monetary flows will depend on whether investors expect higher returns in Canada or the US. With Canada’s economy underperforming amid the weight of tariffs it imposed in retaliation against its southern neighbor, the market is likely to remain biased toward CAD weakness. A sudden and unexpected improvement in the labor market might change this view, as it could signal an imminent economic rebound.
Beyond the Headline Numbers
The BOC cares most about whether the jobs market is “tight” or showing signs of slack. The high unemployment rate indicates a weak labour market, which puts downward pressure on inflation. So, analysts trying to figure out what will happen to interest rates in Canada will look at the components of the labour data to better understand the trend.
A return to positive growth in the number of jobs might be a sign that the labour market has touched bottom. That could prompt the BOC to ease off on its dovish stance and support the CAD, at least until the next meeting. Sectors that are heavily exposed to trade, such as manufacturing, have been driving the weakness in Canada’s jobs market. So, even if the headline data isn’t a blow-out, a rebound in manufacturing jobs could help support the Canadian dollar just as well.
