The Canadian Dollar (CAD) weakened against the US Dollar (USD) on Friday, even though Canadian labor data was better than expected. This helped ease economic worries and reduced the chances of a rate cut by the Bank of Canada. However, tariff threats from the US President limited any gains for the CAD. The CAD reached a two-week low against the USD as Canadian job numbers showed an increase of 83,100 jobs in June, much more than the predicted 0.0. The unemployment rate dropped to 6.9%, while analysts had forecasted it would rise to 7.1%. Market feelings were dampened by the US President’s warning of a potential 35% tariff on Canadian goods starting August 1.

Limited Rate Cut Expectations

Traders currently see only a 20% chance that the Bank of Canada will cut rates this month. The USD/CAD exchange rate is close to 1.3700, with the possible strength of the USD likely pushing the CAD lower. A reversal could happen if the USD continues to gain. The CAD is affected by changes in Bank of Canada interest rates, oil prices, overall economic health, inflation, and trade balance. Generally, a strong economy boosts the CAD by attracting foreign investments. Important economic indicators that impact the CAD include GDP, PMIs, employment figures, and consumer sentiment. In summary, although recent labor data gave a temporary boost to the CAD, ongoing tariff threats and economic uncertainty pose significant challenges for its stability against the USD. Canada recently released impressive labor data—83,100 new jobs in June versus an expectation of zero. The unemployment rate fell to 6.9%, rather than the anticipated rise to 7.1%. Normally, such positive news would strengthen the CAD. Instead, it weakened, hitting a two-week low against the USD and staying around the 1.3700 level. In a market focused on risk, even good data can be overlooked. This reaction isn’t due to just one factor. Yes, the job data raised growth hopes temporarily and stalled immediate calls for a rate cut by the Bank of Canada, with only a 20% chance of easing this month. But we must also consider the potential impacts from the US. The President’s suggestion of a 35% tariff on Canadian imports has created a layer of political uncertainty that markets are taking seriously.

Impact of Tariffs

Higher tariffs lead to increased costs and narrower profit margins, especially for businesses that depend on cross-border trade. Consequently, investors may shy away from assets linked to the CAD, giving the USD an edge. If the US economy remains strong, particularly if upcoming inflation and consumption data surprise, the trend toward USD appreciation could continue. For risk managers, the job data might have initially seemed like an opportunity to invest in a CAD rebound. However, as external pressures grow and trade tensions persist, those hopes could quickly fade. It’s important to note that even impressive economic performance can be overshadowed by broader risks in the market. The USD/CAD could face further challenges if US economic data remains solid, especially since the Federal Reserve does not plan to signal any dovish stance soon. Stronger US consumer price index (CPI) numbers or retail spending could push the pair above 1.3750, potentially reaching late-April highs. Traders should also watch for volatility during key events, especially regarding central bank announcements, as prices can change quickly. While oil prices usually play a significant role, they were not enough to support the CAD this time. If crude prices drop due to decreased global demand or a stronger dollar impacting commodities, the CAD could weaken further. Currently, implied volatility for USD/CAD has started to rise slightly. This indicates that option markets are preparing for a broader range of possible outcomes. Expect more mixed trading signals, especially near key levels. Traders with specific market views may place more weight on US economic data than on Canadian figures unless trade tensions ease. It’s wise to prepare for changes near data releases, as political developments can widen the range of possible outcomes. A strong report or a partial retreat on tariffs could lead to sharp changes in prices. Also, keep an eye on movements in Canadian interest rates; if the chance of a rate cut increases from 20% to 30%, it could quickly drive momentum in one direction. While the data hints at economic strength, it isn’t clearly translating into price strength, indicating asymmetric risk. In today’s FX market, sometimes noise overshadows the actual data, and this is the situation we face. Create your live VT Markets account and start trading now.

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