USD\/CAD continued its decline as Canadian labour data boosted the Canadian Dollar (CAD). Canada added 53.6K jobs in November, and the Unemployment Rate decreased to 6.5%. This outperformed expectations, as markets turned their attention to upcoming US economic releases for further guidance.<\/p>\n
The Canadian economy saw the Unemployment Rate fall unexpectedly, marking the most substantial improvement since late 2021. Wage growth remained steady, with average hourly earnings rising 4.0% year-over-year. This solid performance reinforced expectations that the Bank of Canada (BoC) would keep interest rates unchanged at its December 10 meeting.<\/p>\n
The BoC had previously cut its policy rate by 25 basis points to 2.25% in October. A Reuters poll indicated unanimous expectations among economists that the BoC would maintain its policy rate at 2.25% in the forthcoming meeting. In the United States, focus shifted to upcoming data, including PCE, Personal Income, and Consumer Sentiment readings, to gauge the Federal Reserve\u2019s next policy steps.<\/p>\n
The Bank of Canada influences the Canadian Dollar primarily through interest rates and monetary policy. In limited situations, the BoC enacts Quantitative Easing (QE), which generally weakens the CAD. Conversely, Quantitative Tightening (QT) occurs during economic recovery and usually strengthens the CAD.<\/p>\n
With today’s strong Canadian jobs report, we see a clear policy split forming between the Bank of Canada and the US Federal Reserve. This divergence strongly suggests more downside for the USD\/CAD pair in the coming weeks. We should position ourselves for a stronger Loonie against a weakening US Dollar.<\/p>\n
The newly released US Personal Consumption Expenditures (PCE) data for November showed inflation cooling to 2.8%, further solidifying the case for a Fed rate cut. In fact, Fed funds futures are now pricing in a greater than 95% probability of a 25-basis-point cut at next week’s meeting. This expectation will continue to act as a significant headwind for the US Dollar.<\/p>\n
The Bank of Canada’s stance on December 10th will likely be much different, as this strong labor market gives them little reason to cut rates further. We remember their aggressive hiking cycle through 2023 and 2024, which brought the policy rate from near zero to its current level. The BoC has signaled it is comfortable holding rates steady for now, creating a favorable yield differential for the Canadian Dollar.<\/p>\n
This environment is ideal for using derivatives to express a bearish view on USD\/CAD. We should consider buying put options expiring in late December or January to profit from a potential move lower through the upcoming central bank meetings. We see the next major technical support level around 1.3750, which was the low point we saw back in August.<\/p>\n
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