Canadian Dollar weakens versus USD after release of positive US labor data

Canadian Dollar trades at a new 3-week low vs. the US Dollar following the release of strong US labor market data.
A supportive factor for the Canadian Dollar is high Oil prices after deeper-than-forecast US inventory drawdown data.
The longer-term uptrend may start a new upcycle if USD/CAD can decisively break through the 1.3290 hard ceiling.

Canadian Dollar (CAD) weakens against the US Dollar (USD) on Thursday, after US labor market data from private payrolls giant Automatic Data Processing (ADP) showed a surprise increase in the number of new workers employed in the private sector in June. Other data showed job cuts in the US halved and Continuing Jobless Claims fell more than expected. The data paints a rosier picture of the US economy than had previously been thought and traders are buying USD to the detriment of CAD.

USD/CAD is currently trading well into the 1.33s on Thursday during the US session.

Canadian Dollar news and market movers

US employment data remains strong and continues to show employment gains at the same time as falls in the number of people claiming unemployment benefits. The ADP employment change showed 497K new positions filled in June, hitting out of the park the 228K estimate and well above the 267K May reading. The data suggests Friday's NonFarm Payrolls data will also be higher-than-forecast.
A stronger labor market suggests inflation will remain high, as more people earn and spend, leading the US Federal Reserve (Fed) to hike interest rates which is positive for the Greenback, as it leads to higher capital inflows.
Continuing Jobless Claims fell to 1.72 million versus 1.75M forecast, and below the 1.73M prior. Challenger Job Cuts showed 40.7K cuts – half the 80.1K previously. Initial Jobless Claims data was the only labor market print on Thursday that was negative, after showing a higher-than-expected gain of 248K compared to the 245K expected.
The Canadian Dollar (CAD) had recovered versus the US Dollar (USD) on Thursday morning, on the back of higher Oil prices after API data showed stocks fell 4.383 million barrels in the week ending June 30, substantially more than the 2.408 of the previous week.
Canadian labour market data will be released at the same time as NonFarm Payrolls on Friday (12:30 GMT), Net Change in Employment in June expected to be 20K and the Unemployment Rate 3.6%. Strong-than-expected labor data, especially if it is viewed more positively than the data from the US, will support the CAD and be negative for USD/CAD.
The API data indicates robust continued demand and helps Oil build on its earlier rally at the start of the week after Saudi Arabia and Russia announced supply cuts.
The US Federal Reserve (Fed) released the minutes of its June FOMC meeting on Wednesday evening, revealing members continued concern with bringing down stubbornly high inflation. Most of the 18 board members foresee further cuts as necessary and Fed Chairman Jerome Powell has already suggested two more hikes in 2023 may be a possibility.
This tallies with forecasts from financial data provider Trading Economics, which shows the Fed is expected to hike rates by 0.25% in both Q3 and Q4 before peak rate is reached at 5.75%. This compares with only one 0.25% hike in Q3 in the case of the BoC, to reach a peak rate of 5%.
OPEC’s triennial get-together, the 8th International Seminar, is underway in Vienna and will last till the end of Thursday, July 6. Oil Ministers from member states will meet other key players in the field of global energy. Reporters’ access to the event has been limited, but there is a possibility of news leaks impacting Oil prices and therefore CAD, since Crude is Canada’s largest export.

Canadian Dollar Technical Analysis: Signs of a reversal in line with longer-term uptrend

USD/CAD has been in a long-term uptrend on the weekly chart since the 2021 lows. Since October 2022, it has been in a sideways consolidation within the uptrend and currently sits at the bottom of that range. Given that the trend has a tendency to extend, the probabilities overall favor longs over shorts.

The USD/CAD appears to have completed a measured move price pattern since the March 2023 highs. The measured move is a 3-wave zig-zag-like price pattern, much like an ABC correction in which the first and third waves are of a similar length (waves A and C on the chart below).

The measured move on USD/CAD looks like it has probably completed since waves A and C are of a similar length. If so, price has probably bottomed and is about to begin a cycle higher.

US Dollar vs Canadian Dollar: Weekly Chart

There is also a confluence of support just under the June lows in the late 1.30s, made up of several longer moving averages and a major trendline. This is likely to underpin price at this level and reduces the chances of a breakdown. Only a decisive break below 1.3050 would provide evidence this thick band of weighty support has been definitively broken. A decisive bearish break is one that is accompanied by a longer-than-average red candlestick or three red candlesticks in a row.

US Dollar vs Canadian Dollar: Daily Chart

The daily chart further suggests the potential for a bullish recovery. The move up from the June 27 bottom has been accompanied by strong momentum, as shown by the high reading on the Relative Strength Index (RSI) momentum indicator, which is higher than it was when prices were more elevated prior to the market bottom.

The price has broken above the 1.3270 key lower high, potentially confirming a short-term bullish reversal. The move could see a rise up to possibly as high as 1.3400 and the 50-day Simple Moving Average, bringing the short-term trend in line with the longer-term uptrend.

The break above the 1.3270 key lower high now appears decisive after the stronger-than-expected US employment data on Thursday. The high number of failed attempts at breaking above the 1.3270-1.3300 resistance band has led to a volatile breakout. This is due to a technical phenomenon whereby a level gains significance the more times it is touched by price but not actually breached. When such a level is finally broken the resulting move is often very volatile and strong, potentially presenting an opportunity to traders.

As long the exchnage rate does not fall back below the 1.3300 level on Thursday the break looks to have solidified a new short-term uptrend that could be beginning the next upcycle in the longer-term uptrend, and secures a bullish outlook for the pair.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.

How do the decisions of the Bank of Canada impact the Canadian Dollar?

The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.

How does inflation data impact the value of the Canadian Dollar?

While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.

How does economic data influence the value of the Canadian Dollar?

Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.

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