USD/CAD slipped to 1.4180 on Thursday, down 0.26% on the day, after touching 1.4150, its lowest in more than a week. The move followed a weaker US labour report from the Bureau of Labor Statistics, which showed June Nonfarm Payrolls rising by 57K versus expectations of 110K. Prior months were also marked down: May was revised to 129K from 172K and April to 148K from 179K, a combined downward revision of 74K.
Other labour indicators were mixed, with the Unemployment Rate easing to 4.2% from 4.3% even as the Participation Rate fell to 61.5% from 61.8%. Average Hourly Earnings increased 3.5% YoY, matching forecasts. Rate expectations shifted after the data, and the CME FedWatch tool put the probability of two Fed hikes this year at 27.8%, down from 31.9% the previous day. In Canada, the S&P Global Manufacturing PMI edged up to 53 in June from 52.9, while CAD dynamics were also influenced by falling crude prices linked to shipping via the Strait of Hormuz and Washington–Tehran diplomacy.
Rapidly Changing Fed Expectations amid Weak US Jobs Data
We are seeing the market aggressively reprice expectations for the Federal Reserve. The shockingly low 57K jobs added in June, plus the significant downward revisions for the prior two months, suggest a rapid cooling of the US labor market. This weakness has pushed the probability of two Fed rate hikes this year below 28%, directly weighing on the US Dollar.
This jobs report creates a serious dilemma for the Fed, putting the upcoming June Consumer Price Index (CPI) report on July 16th into sharp focus. With wage growth holding firm at 3.5% and Core CPI for May coming in at 3.4%, any sign of persistent inflation alongside this hiring slowdown will amplify market uncertainty. We anticipate this will lead to a significant increase in price swings for USD pairs.
Volatility and Trading Outlook for USD/CAD
For derivatives traders, this points toward higher volatility in the near term. The 1-month implied volatility for USD/CAD has already jumped from around 6.5% to 7.8% following the jobs data. We believe strategies that profit from increased price movement, such as buying straddles or strangles, are now more attractive than taking a simple directional view.
However, we must temper our bearish outlook on the USD/CAD pair due to weakness in oil prices. With WTI crude recently breaking below $80 a barrel on easing geopolitical tensions in the Middle East, the Canadian Dollar faces a significant headwind. This will likely limit the Loonie’s upside potential and create a floor for the currency pair.
Given these opposing forces, we expect USD/CAD to become choppy and range-bound rather than enter a new downtrend. We will be watching the recent low of 1.4150 as a key support level. Selling options with strikes outside of an expected 1.4150-1.4350 range could be a viable strategy in the coming weeks.
