USDCAD A tale of two labor markets

Markets are beginning to settle into traditional ‘Dog Days of Summer’ trading, with major indices, commodities and currency pairs seeing relatively little movement on the eve of tomorrow’s highly anticipated US CPI report (see our complete overview of the CPI!).

Traders are still digesting last week’s US jobs report, but one thing is clear: The U.S. labor market surpasses that of Canada. While the United States has just experienced its strongest job growth in five months, a new cyclical low in its unemployment rate, and has fully recovered all job losses since the start of the pandemic , Canada has now seen two consecutive months of net declines in full-time employment.

Central banks around the world have remained hyperfocused on inflation, but an outright contraction in employment, particularly amid falling commodity prices and a slowing global economy, could certainly prompt some to slow down or suspend their tightening cycles. This is now the reality the BOC must grapple with, presenting a possible bullish catalyst for the US Dollar against the Loonie.

USD/CAD technical analysis

As shown in the chart below, USD/CAD found support on its rise from the 100-day EMA at the start of the month, forming consecutive bullish candlestick patterns In the process. Now, if traders start pricing a pause earlier for the BOC than the Fed, USD/CAD could rebound towards 1.3000 or 1.3100 in the coming days:

Source: StoneX, TradingView

Meanwhile, a break below last week’s low and the 100-day EMA around 1.2820 could erase the short-term bullish bias and leave the prospects for the North American pair more confused than ever.