Loonie Stages Comeback as Fed Holds Interest Rates and US Jobs Disappoint

The Canadian dollar has staged a remarkable recovery after hitting 14-month lows in July. The USD/CAD exchange rate plummeted to levels not seen since early June, but has since reversed course and dropped to around 1.40.

The turning point came on July 29 when the Federal Reserve voted to keep its benchmark interest rate unchanged at 3.50%-3.75%. Although three Fed governors dissented, arguing for a hike due to persistent inflation in the US, the majority decision nudged USD/CAD down and gave the loonie a boost.

The jobs report for July was another significant factor in the Canadian dollar's resurgence. The US nonfarm payrolls showed a decline of 23,000 jobs, which far exceeded economists' expectations of a gain of 80,000. This unexpected weakness in the US labor market led traders to reassess their assumptions about future Fed hikes.

The widening interest rate gap between the US and Canada, with the Bank of Canada holding at around 2.25%, created a gravitational pull toward the greenback. Analysts at Scotiabank and CIBC pointed out that this differential was the primary force driving CAD weakness earlier in the year. However, as markets began to reprice the probability of additional Fed hikes, the loonie benefited from energy price supports due to Canada's status as a major oil exporter.