USD\/CAD edged higher on Friday, up 0.13% to about 1.4200. The move came as weakness in the Canadian Dollar outweighed pressure on the US Dollar after a softer US jobs report, keeping the pair supported even as rate expectations shifted. In June, Nonfarm Payrolls rose by 57K versus forecasts of 110K, and May was revised down to 129K from 172K. Following the data, the CME FedWatch tool showed the implied probability of a September Federal Reserve rate rise falling to 53% from 63%, while the odds of a December move stood at 76.8%.<\/p>\n
The Canadian Dollar continued to lag as lower global oil prices eroded Canada\u2019s terms-of-trade support and reinforced expectations of a dovish Bank of Canada stance if disinflation persists. Domestic indicators offered only marginal help: Canada\u2019s S&P Global Manufacturing PMI ticked up to 53 in June from 52.9 in May. Labour conditions were described as soft but stabilising, with employment growth under 1% year-on-year and gains concentrated in full-time roles, while attention now turns to Canada\u2019s employment report for clues on the economy and BoC policy.<\/p>\n
We see the weak US jobs report as creating a messy, but ultimately favorable, environment for a higher USD\/CAD. The market is punishing the Canadian Dollar for its fundamental weaknesses more than it is punishing the US Dollar for one soft data point. This suggests the path of least resistance for the pair remains upward.<\/p>\n
The underlying problem for the loonie is the slide in energy prices, with WTI crude oil recently breaking below $72 a barrel according to the latest EIA reports. This directly impacts Canada’s terms of trade and reinforces our view that the Bank of Canada will remain dovish. Historically, periods of sustained oil weakness, like in 2015, have pushed USD\/CAD significantly higher, often above the 1.4500 level.<\/p>\n
This weakness is compounded by the widening interest rate differential between the two countries. We note the Bank of Canada already initiated an easing cycle with a 25 basis point cut in June, bringing their policy rate to 4.50%. While odds for a September Fed hike have dipped, the federal funds rate remains firmly above 5.0%, making the US Dollar the more attractive currency to hold.<\/p>\n
Given this dynamic, we are looking at buying out-of-the-money call options on USD\/CAD with a September expiration. This strategy allows us to capitalize on a potential move towards the 1.4400 level over the coming weeks. The limited premium paid represents our maximum risk, protecting us from a sharp, unexpected reversal.<\/p>\n
We are treating the upcoming Canadian employment report as a potential source of volatility rather than a trend-changer. A weak Canadian jobs number would accelerate the move higher, while an unexpectedly strong report might offer a temporary dip. We would view any such dip as a more attractive entry point to build our long position.<\/p>\n\n\n\n