USD/CAD failed to build on a modest rebound from a near two-week low and eased for a second session after an Asia uptick towards 1.4200. The pair hovered near the overnight trough around the mid-1.1400s, putting it on track for its first weekly loss in five weeks. Pressure came as the US dollar sat near a two-week low after weaker US labour data prompted markets to scale back expectations for tighter Federal Reserve policy.
June Nonfarm Payrolls showed 57K jobs added versus a 110K forecast, while May was revised down to 129K from 172K and unemployment edged lower to 4.2%. With crude oil rebounding from its lowest level since late February after Iran warned of a “decisive and swift response” to any US interference in the Strait of Hormuz, the Canadian dollar found support. Canada’s currency also takes cues from Bank of Canada settings, where inflation is targeted at 1–3%, alongside oil prices, growth data and the trade balance; thinner liquidity during the US holiday tempered follow-through.
US Jobs Data and Federal Reserve Expectations
We believe the downturn in USD/CAD is set to continue in the coming weeks. The recent US jobs report, showing a disappointing addition of only 57K jobs in June, has fundamentally altered market expectations. This weak data confirms a cooling labor market, which has led us to re-evaluate the Federal Reserve’s path forward for the rest of the year.
Consequently, market pricing for interest rates has shifted dramatically, with Fed funds futures now suggesting a near-zero probability of any rate hikes in 2026. Data from the CME Group’s FedWatch Tool now implies a greater than 60% chance of at least one rate cut by the end of the year, a stark reversal from just a month ago. For derivative traders, this suggests that buying put options on USD/CAD to position for further downside is a prudent strategy.
Canadian Dollar Support and Trading Strategies
On the other side of the pair, the Canadian dollar is finding strong support from rising energy prices. West Texas Intermediate (WTI) crude has climbed back above $80 a barrel, bolstered by renewed geopolitical tensions in the Strait of Hormuz. Historically, a sustained oil price above this level has strongly correlated with a stronger loonie, providing a powerful headwind for the USD/CAD exchange rate.
We acknowledge that the Bank of Canada has already begun its own easing cycle, having cut its policy rate by 25 basis points last month to 4.75%. However, the market appears to be weighing the dovish shift from the US Federal Reserve more heavily at this moment. The divergence in economic surprises, with US data weakening more than expected, is currently the dominant driver of the pair’s direction.
Given these cross-currents, we anticipate heightened volatility will be a key feature of the market. Traders might consider using options strategies like straddles if they expect a sharp move but are uncertain of the immediate timing, though our core view remains bearish. We will be closely watching Canada’s upcoming inflation report for any signs that could alter the Bank of Canada’s path and inject new life into the pair.
