Canadian Dollar Holds Firm Ahead of US, Canada Jobs Data

Key Moments

USD/CAD Steadies Near Recent Lows

The USD/CAD pair is trading in consolidation below the 1.3800 handle during the Asian session on Friday, hovering close to the nearly two-week trough reached in the prior session. Despite the pause, the pair is on track for notable weekly losses. The broader backdrop continues to favor an extension of the sharp decline that started from the 1.3940 area, which marked a three-week high on Wednesday.

Oil Strength and BoC Stance Bolster the Loonie

Crude oil prices are holding near their highest levels since July 24, supported by a sustained geopolitical risk premium amid ongoing US-Iran tensions around the Strait of Hormuz. The strength in oil is providing ongoing support to the commodity-linked Canadian Dollar.

At the same time, the Bank of Canada’s hawkish message at its September policy meeting is offering an additional tailwind for the Loonie. This combination is reinforcing the near-term bearish outlook for USD/CAD, particularly against the backdrop of a generally weak US Dollar.

Fed Rethink Weighs on the Dollar

The US Dollar Index (DXY), which gauges the performance of the USD against a basket of major peers, dropped to an over one-week low on Thursday as expectations for a Federal Reserve rate hike in September receded. Fed Governor Christopher Waller commented that inflation is showing some signs of slowing, keeping open the possibility that policy could remain unchanged. In response, market participants pushed US bond yields lower, leaving USD bulls on the back foot.

Despite this, investors are reluctant to initiate large new positions until they have clearer guidance on the Fed’s next steps. As a result, attention is firmly centered on the upcoming US Nonfarm Payrolls report, which will be released alongside Canada’s latest employment data. These releases, together with any additional developments related to the Middle East situation, are expected to be key drivers for USD/CAD going into the weekend.

Focus on Inflation as Key Driver for Fed and Dollar

Analysts at TD Securities emphasize that the labor market data alone will not determine the Fed’s decision for September. The institution notes that “a strong payrolls report is a necessary but not a sufficient condition for the Fed to hike in September,” adding that “the more important piece of the puzzle is inflation as part of the strength in the NFP can be considered to be a reversal of the July weakness.”

TD Securities also argues that “a strong payrolls report, in line with our macro team’s view above, will give a slight boost to the USD but is unlikely to push the committee towards a hike unless followed by a strong inflation print,” highlighting that upcoming inflation data, rather than jobs alone, will likely be the deciding factor for the Fed’s policy trajectory and the Dollar’s direction.

USD/CAD Technical Setup

This week, USD/CAD failed to sustain a move above the 100-day Simple Moving Average (SMA) and subsequently dropped below the 61.8% Fibonacci retracement level. This pattern favors sellers and suggests that rallies are likely to encounter selling pressure while the pair trades below this upper band, leaving spot levels exposed to further declines.

The current configuration indicates that downside risks remain while the pair trades below the highlighted resistance band, with sellers likely to remain active on rebounds.