The Canadian Dollar rose against the US Dollar, breaking a six-day decline after positive labor market data in Canada. The USD/CAD rate fell to 1.4064, down 0.35%. Statistics Canada reported that 66.6K jobs were added in October, which was much better than the expected loss of 2.5K jobs. The unemployment rate also dropped to 6.9% from 7.1%. Average hourly wages increased by 4.0% from September’s 3.6%, even though total hours worked decreased slightly due to strikes. Employment grew especially strong in services and private-sector jobs. This report supports maintaining the Bank of Canada’s current policy after a recent rate cut.

Inflation Issues Affect US Economy

In the US, the University of Michigan’s survey showed a drop in consumer sentiment due to inflation worries. The index fell to 50.3 from 53.6. The one-year inflation outlook increased to 4.7%, while the five-year outlook decreased to 3.6%. The US Dollar Index fell to 99.42, its lowest in a week, continuing a downward trend that started after a five-month high. The strong Canadian jobs report has changed the outlook for the Canadian Dollar significantly. The unexpected addition of 66.6K jobs suggests that the Bank of Canada may not need to cut rates soon. Current market pricing, based on overnight index swaps, shows over an 85% chance that the BoC will keep its policy rate the same at the December meeting. The 4.0% increase in average hourly wages is noteworthy, indicating that inflation might last longer than expected. This puts a spotlight on the Canadian CPI report coming in mid-November for confirmation. A strong inflation report would reinforce the case for the BoC to remain steady, supporting the Loonie. Meanwhile, the US economy shows signs of weakness. The University of Michigan Consumer Sentiment index dropped to 50.3. This aligns with other recent data, like the October ISM Manufacturing PMI, which showed a contraction at 48.5. This trend suggests the US economy is beginning to slow down.

Policy Differences Between US and Canada

The growing gap between a surprisingly strong Canadian economy and a slowing US economy will drive the market in the coming weeks. Futures markets, as shown by the CME FedWatch tool, now predict a greater than 60% chance of a Federal Reserve rate cut by March 2026. In contrast, the BoC seems to be wrapping up its easing cycle. For traders of derivatives, this outlook favors strategies that benefit from a lower USD/CAD exchange rate. It might be wise to consider buying Canadian Dollar call options or using bullish risk reversals to bet on further CAD strength. These option structures provide a clear way to profit from potential declines in the currency pair. Short-term implied volatility in USD/CAD may rise as we near the Canadian CPI data release. This suggests traders should be careful with strategies that involve selling options, as unexpected data could cause sharp price changes. We are considering reducing our long USD/CAD positions and will look for a drop below the 1.4000 level to start new shorts. Create your live VT Markets account and start trading now.

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