US Labor Market Cooling Sends CAD Soaring Amid Weaker Payrolls
The US Dollar (USD) weakened sharply after the release of a much weaker-than-expected US employment report, while the Canadian Dollar (CAD) gained support from upbeat domestic data.
According to the US Bureau of Labor Statistics (BLS), Nonfarm Payrolls (NFP) fell by 23K in July, compared with market expectations for an increase of 80K. Revisions were also significant, with June and May payrolls revised down by a combined 103K jobs.
Despite this sharp deterioration, the Unemployment Rate edged down to 4.1% from 4.2%, while annual Average Hourly Earnings growth slowed to 3.2%. This cooling of the US labor market led investors to scale back expectations for monetary tightening by the Federal Reserve (Fed), with the chance of a 25-basis-point rate hike at the September meeting falling to 42%.
Canadian data provided additional support to the Canadian Dollar, with Statistics Canada reporting that the Unemployment Rate fell to 6.4% in July, below market expectations. Employment increased by 75.1K jobs, comfortably beating forecasts of 15K, while the Labor Force Participation Rate rose to 65.1%. These figures strengthened the Canadian currency and added further downside pressure on USD/CAD.
TD Securities noted that the sharp reaction in FX markets suggested that the market remains focused on both central-bank divergence and Canada's domestic outlook. They caution that sustained USD weakness will likely require softer US CPI, with next week's US CPI report flagged as the next major test for near-term Fed rate hike pricing.