USD/CAD dropped again as strong Canadian job numbers supported the Canadian Dollar (CAD). In November, Canada added 53.6K jobs, and the Unemployment Rate fell to 6.5%. This was better than expected, leading markets to focus on upcoming US economic data for direction.

Bank of Canada’s Policy Decision

Canada’s Unemployment Rate saw a surprising decline, marking the most significant improvement since late 2021. Wage growth was steady, with average hourly earnings increasing by 4.0% year-over-year. This solid performance boosted expectations that the Bank of Canada (BoC) would keep interest rates steady at its December 10 meeting. In October, the BoC had reduced its policy rate by 25 basis points to 2.25%. A Reuters poll showed that all economists expect the BoC to maintain this rate in the next meeting. In the US, attention turned to upcoming data, like PCE, Personal Income, and Consumer Sentiment, to determine the Federal Reserve’s next moves. The Bank of Canada mainly affects the Canadian Dollar through interest rates and monetary policy. Sometimes, the BoC implements Quantitative Easing (QE), which usually weakens the CAD. In contrast, Quantitative Tightening (QT) happens during economic recovery and typically strengthens the CAD. Today’s strong Canadian jobs report highlights a clear policy divide between the Bank of Canada and the US Federal Reserve. This difference suggests further decline for the USD/CAD pair in the coming weeks, indicating a stronger Loonie against a weaker US Dollar. Newly released US Personal Consumption Expenditures (PCE) data for November showed inflation easing to 2.8%, supporting the case for a Fed rate cut. Fed funds futures now suggest a greater than 95% chance of a 25-basis-point cut at next week’s meeting, which will put more pressure on the US Dollar.

Market Strategies Going Forward

The Bank of Canada’s position on December 10th is expected to be different, as this strong labor market gives them little reason to cut rates further. They have already raised rates aggressively throughout 2023 and 2024, increasing from near zero to the current level. The BoC has indicated its comfort with maintaining rates for now, creating an attractive yield differential for the Canadian Dollar. This situation is ideal for using derivatives to express a bearish outlook on USD/CAD. We should think about buying put options that expire in late December or January to benefit from a potential decline ahead of the upcoming central bank meetings. The next significant technical support level is around 1.3750, which was the low point seen back in August. Create your live VT Markets account and start trading now.

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