USD/CAD Outlook: Weak Jobs Challenge the Case for Canadian Rate Rises
JP Morgan analysts doubt the Canadian economy can sustain the rate rises investors expect, leaving the CAD Dollar vulnerable to further USD strength.
Canada’s weak jobs market is making an ambitious path of interest-rate increases harder to justify, according to JPMorgan’s trading desk, as the US Dollar returns towards C$1.43.
Before Wednesday’s US inflation release, the bank estimated that currency markets were anticipating roughly four Bank of Canada hikes over the following 12 months.
The desk says: “We remain bearish on the Canadian economy amid headwinds from the re-categorisation of the US-CA trade relationship, and hence sceptical that the BoC can deliver the ~4 hikes the market is pricing over the next 12 months.”
At the time of writing, USD/CAD stood at 1.4283, up 0.46% on the day.
Dollar to Canadian Dollar (USD/CAD): 1.42105 (-0.02%)
Euro to Canadian Dollar (EUR/CAD): 1.593527 (+0.15%)
The CAD’s interest-rate support is vulnerable if weak activity forces investors to scale back those assumptions.
The September employment report supplies a concrete reason for caution: Canada lost about 68,000 jobs, while unemployment rose to 6.5%.
A December hike may already be reflected in the currency
Foreign exchange analysts at ING also suspect limited currency benefit from a policy move that investors already expect.
Its FX strategists write: “We now think the Bank of Canada will hike rates in December. Markets have been pricing it in for some time now, and it won’t be enough to drive USD/CAD lower by itself.”
“October looks premature considering the struggling jobs market, with September posting further jobs losses alongside a tick higher in unemployment to 6.5%.”
That leaves the Canadian currency dependent on changes beyond Ottawa.
One ING analyst says: “A combination of dovish repricing in Fed rate expectations and improved global financial/risk conditions remain necessary to take the pair back towards 1.40. We doubt this will happen already before year-end.”
Wednesday’s US inflation figures, with core prices rising 0.3% month on month, leave that hoped-for easing in American rate expectations under pressure.
Trade uncertainty also constrains the growth outlook even when it does not dominate daily currency trading.
ING continue: “US-Canada trade tensions are not playing a major role in CAD trading, but they remain a non-negligible downside risk, either directly or indirectly via a softer economic outlook and less room for rate increases.”
Buying interest has not established a reversal
JP Morgan’s caution develops the distinction between temporary demand and lasting economic support in our earlier assessment of a fragile Canadian Dollar bounce.
The desk has again seen some buying from systematic investors, whose activity follows model-based rules.
The desk says: “Flow-wise, systematics turned buyers of the Loonie after four sessions of supply, whereas other account types were quiet.”
Lloyds’ separate chart analysis also stops short of identifying a sustained Canadian Dollar recovery.
Lloyds says: “But it’s hard to see this as a reversal pattern at the moment. It looks more like consolidation, with space for the uptrend to extend back into the realms of the early 2025 ranges.”
Lloyds sees scope beyond 1.45 if the uptrend extends, a conditional chart projection rather than a dated forecast.
A fall through 1.4140-1.4151 would instead suggest a top.
USD/CAD exchange rate FAQ
Why is JP Morgan cautious about the Canadian Dollar?
Its trading desk doubts Canada’s economy can withstand the scale of tightening investors had anticipated, particularly with US trade pressures weighing on growth.
Would a Bank of Canada hike necessarily strengthen the Loonie?
ING argues that an anticipated December increase would offer limited support on its own.
Is 1.45 a fixed USD/CAD forecast?
No. Lloyds sees scope beyond that level if the existing uptrend extends, rather than predicting it for a particular date.
