The US Dollar slightly increased against the Canadian Dollar, reaching 1.3970 after bouncing back from a recent low of 1.3940. However, the overall trend is downward, with the Dollar falling by more than 1% in less than two weeks. This decline is mainly due to the different monetary policies of the Bank of Canada and the US Federal Reserve. The US job market is in the spotlight after the ADP Employment Change report showed a loss of 32,000 jobs in November. This was unexpected, as the market predicted an increase of 5,000 jobs. The previous month’s gain was also revised down to 47,000 jobs. Additionally, the US Challenger Job Cuts reported 71,321 layoffs in November, a decrease from September’s figure of 153,074. First-time unemployment claims are expected to rise to 220,000, up from 216,000 last week.

Canadian Economic Indicators

In Canada, the IVEY Purchasing Managers’ Index is expected to increase to 53.6, up from 52.4 in October. This improvement follows strong Q3 GDP data, which may support the Bank of Canada’s decision to keep interest rates steady in December. The US Federal Reserve is anticipated to lower rates after its December meeting, with an 89% likelihood of a 25 basis point cut. More reductions are expected next year, putting additional pressure on the US Dollar. Today, the US Dollar has seen a slight rebound, but it remains weak against the Canadian Dollar. It has dropped over 1% in under two weeks, mainly due to the diverging policies of the US and Canadian central banks. This difference is the key factor affecting the currency pair. The unexpected loss of 32,000 private jobs reported by ADP raises concerns about the US economy, just before the official Non-Farm Payrolls (NFP) report is due tomorrow. Economists are already revising their NFP predictions, with some forecasting the first negative figure since the brief downturn in early 2024. This trend of weakening labor data is similar to what we saw in late 2023, marking the end of a significant rate-hiking cycle.

Market Expectations

Markets are now confident that the Federal Reserve will act, with an 89% chance of a rate cut expected in the meeting on December 10th. Looking ahead, interest rate futures suggest the market anticipates at least two or three more cuts by 2026. This aggressive easing strategy is putting considerable pressure on the US Dollar. In contrast, Canada’s economy appears stronger, supported by solid Q3 GDP figures and an expected improvement in today’s Ivey PMI report. This data provides the Bank of Canada with a reason to maintain its interest rate in December, setting it apart from the Fed. The widening policy gap is the main reason for the relative strength of the Canadian Dollar. For derivative traders, this situation indicates ongoing weakness in the USD/CAD currency pair. With major events like the NFP report tomorrow and the Fed decision next week, we anticipate increased volatility, making options more appealing. Strategies such as purchasing USD/CAD put options that expire after the Fed meeting could be an effective way to prepare for a potential decline in the exchange rate. Create your live VT Markets account and start trading now.

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