Loonie Firms as Markets Await Jobs Data, Policy Signals

Key Moments

CAD Gains Into Canadian Jobs Report

The USD/CAD pair slipped to roughly 1.4220 during early European trading on Friday, with the Canadian Dollar (CAD) advancing against the US Dollar (USD) as the gap between US and Canadian yields pulled back from historically wide levels seen earlier in the week. Market attention is focused on Canada’s September employment report due later in the day.

Canada’s two-year government bond yield was trading about 152 basis points below the equivalent US maturity, compared with a 158 basis point gap on Monday, when the spread hit its widest point since February 2025.

Economists anticipate an increase of 7,000 jobs in September following a sharp decline of 41,700 positions in the prior month. At the same time, the Unemployment Rate is expected to edge higher to 6.5% in September from 6.4% in August. The data are seen as an important gauge of the Canadian economy’s momentum and could shape expectations for how the Bank of Canada (BoC) approaches future policy decisions.

A softer crude oil backdrop could limit gains for the commodity-linked Canadian Dollar. According to Reuters, US President Donald Trump said on Thursday that Washington would not launch an attack on Iran before November’s midterm elections and pointed to ongoing “productive discussions” with Tehran. Canada is a major oil exporter, and higher crude prices generally support the Loonie.

Rabobank: Yield Differentials Still Favor USD/CAD Upside

Rabobank strategists noted that, “after a spectacular CAD sell off which lasted the past month, from September 9 to October 5 USD/CAD is now trading sideways around 1.425, after failing to break above resistance at 1.43 on October 5, but still marking a dramatic retracement from September’s low of 1.373.” They continue to see policy divergence between the United States and Canada as the primary driver and commented that, “therefore, we are forecasting a marginally widening differential from 175bp now to 200bp by the end of this year, where we expect it to stay throughout 2026.”

In their view, this expected widening in rate spreads should keep upward pressure on USD/CAD. Rabobank stated that, “we expect this policy divergence to push USD/CAD through the resistance trend line (see Figure 1) and make a run for 1.45.” They further added that, “given the widening differential, coupled with the potential for higher US yields post-US midterms, we see USD/CAD trading up to 1.45 on a three-month view.”

At the same time, Rabobank highlighted complexities in the domestic Canadian backdrop. They observed that, “therefore, despite weak economic activity, and a deteriorating trade dynamic with the US, the Canadian OIS curve is implying almost four more hikes from the Bank of Canada by September of next year,” underscoring the tension between softer growth indicators and a still-hawkish policy path priced into rates markets.

Summary of Yield Spreads and Projections

Fed Messaging: Waller Keeps Hawkish Bias Intact

Federal Reserve Governor Waller delivered remarks that were interpreted as firmly hawkish. His comments received an 8/10 score on the FXS Speechtracker, above the 7.2/10 historical average, highlighting a stronger-than-normal inclination toward tighter policy. The emphasis that additional rate hikes are warranted, even while he stresses a flexible and non-consecutive approach, points to a prolonged period of restrictive policy, framed around persistent inflation pressures tied to AI-related investment and energy shocks, alongside signs of a firming economy and resilient labor market.

Waller also warned that nearly 5-1/2 years of inflation above target could destabilize expectations, reinforcing the stance of maintaining a tight policy setting even if the pace of hikes is less linear.

The FXS Fed Sentiment Index advanced by 0.42 points to 138.34, remaining firmly in hawkish territory and aligning with the elevated FXS Speechtracker reading. This shift suggests markets viewed Waller’s focus on further hikes and on policy signaling, rather than rigid forward guidance, as broadly supportive of the US Dollar backdrop, even if the exact timing of any additional tightening steps stays uncertain.

USD/CAD Technical Picture: Bullish Bias Above 100-Day Average

On the daily chart, USD/CAD maintains a constructive short-term structure, trading above both the 100-day moving average (MA) and the middle line of the Bollinger Bands. The pair is moving within the upper segment of its recent volatility band, while the 14-period Relative Strength Index, near 65, indicates solid but not overstretched upside momentum. This configuration suggests buyers continue to dominate as long as these underlying levels are preserved.

On the downside, initial support appears at the Bollinger middle band around 1.4125. Below that, more substantial demand is seen at the 100-day MA near 1.4015, followed by the lower Bollinger band close to 1.3895. On the upside, the next notable resistance is located at the upper Bollinger band around 1.4355. A decisive break above that ceiling would point to additional gains, while failure to clear it could lead to a corrective move back toward the aforementioned support zones.