The Canadian Dollar improved against the US Dollar, ending a six-day losing streak after favourable labour market data in Canada. The USD/CAD rate dropped to 1.4064, a 0.35% decrease. Statistics Canada reported an addition of 66.6K jobs in October, surpassing expectations of a 2.5K decline, with the unemployment rate decreasing to 6.9% from 7.1%.

Average hourly wages increased by 4.0% compared to September’s 3.6%, despite a minor decrease in total hours worked due to strikes. Employment growth was particularly strong in services and private-sector hiring. This performance supports keeping the Bank of Canada’s policy steady after a recent rate reduction.

Inflation Concerns Impact US Economy

In the US, the University of Michigan’s survey showed a decrease in consumer sentiment due to inflation concerns, with the index falling to 50.3 from 53.6. The 1-year inflation outlook rose to 4.7%, while the 5-year measure dropped to 3.6%. The US Dollar Index fell to 99.42, its lowest in a week, extending a downward trend that began after reaching a five-month high.

Based on the strong Canadian jobs report, the narrative for the Canadian Dollar has shifted significantly. The unexpected addition of 66.6K jobs challenges the view that the Bank of Canada will need to cut rates again soon. We are seeing market pricing, based on overnight index swaps, now reflect an over 85% probability that the BoC will hold its policy rate steady at its December meeting.

The 4.0% rise in average hourly wages is particularly important, suggesting that inflationary pressures may persist longer than anticipated. This places a heavy focus on the upcoming mid-November Canadian CPI report for confirmation. A strong inflation reading would further cement the case for the BoC to remain on the sidelines, supporting the Loonie.

In contrast, the US economy is flashing signs of weakness, with the University of Michigan Consumer Sentiment index falling to just 50.3. This aligns with other recent data points, such as the October ISM Manufacturing PMI we saw last week, which printed at a contractionary 48.5. This trend supports the view that the US economic engine is beginning to cool.

Policy Divergence Between US and Canada

This growing policy divergence between a surprisingly resilient Canadian economy and a slowing US is the key driver for the coming weeks. We note that futures markets, reflected in the CME FedWatch tool, are now pricing in a greater than 60% chance of a Federal Reserve rate cut by March of 2026. This stands in sharp contrast to the BoC, which now appears to be ending its easing cycle.

For derivative traders, this outlook favors strategies that benefit from a lower USD/CAD exchange rate. We believe it is prudent to consider buying Canadian Dollar call options or using bullish risk reversals to position for further CAD strength. These options structures provide a defined-risk way to capitalize on potential downside in the currency pair.

Short-term implied volatility in USD/CAD may rise as we approach the Canadian CPI data release. This suggests traders should be cautious with strategies that involve selling options, as a data surprise could lead to sharp price movements. We are considering reducing existing long USD/CAD positions and looking for a break below the 1.4000 level to initiate new shorts.

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