USD/CAD Market Update

Current Level: Mid-1.41s, off the week's highs (24hr range 1.4150 to 1.4225)

USD/CAD starts the holiday-shortened session in the mid-1.41s after a soft US jobs report knocked the greenback lower. Nonfarm payrolls rose 57,000 in June, well short of expectations, sending Treasury yields and the US dollar lower across the board. The pair traded down to 1.4150 intraday, its lowest level of the week, before settling near 1.4167. US markets close early this afternoon ahead of the Independence Day long weekend.

Market Overview:

Risk appetite is positive this morning. Equity markets opened higher and Treasury yields fell as the softer labour data eased concerns about a more hawkish Federal Reserve in the second half of the year. The US dollar is weaker against the G10 following the release. CIBC strategists reiterate that USD/CAD is trading roughly two standard deviations above their estimated fair value and argue that current levels strongly favour US dollar sellers, though they acknowledge the timing of any reversion is uncertain.

US Payrolls Miss Cools Fed Tightening Bets:

The June employment report was the main event. Nonfarm payrolls rose 57,000, well below the consensus near 113,000, while May was revised lower to 129,000 from 172,000, according to CIBC. The unemployment rate ticked down to 4.2% from 4.3%, but the decline was driven by a 700,000 drop in the labour force rather than stronger hiring, pushing the participation rate down to 61.5%. Average hourly earnings held at 0.3% month over month. CIBC describes the report as a labour market cooling back toward balance, soft enough to ease near-term rate-hike concerns but not weak enough to revive recession fears. Treasury yields and the US dollar both moved lower in response.

Canadian Data/Outlook:

There was no major Canadian data on the session, leaving the Canadian dollar to trade off the broad US dollar move. CIBC shows the Bank of Canada on hold at its July 15 meeting, with markets pricing no change in either direction. The CUSMA joint review that triggered on July 1 remains a background overhang for the Canadian dollar, though the process was well telegraphed and markets have largely looked through it so far. Soft oil prices and a neutral Bank of Canada remain longer-term headwinds, but the clear near-term driver today was the US labour data.

Fed Watch:

Following the payrolls miss, markets pared expectations for further Federal Reserve tightening. CIBC's central bank monitor shows just a 19% probability of a 25 basis point hike at the July 29 meeting, with no rate cut priced in. The soft jobs data reinforces the case for a patient Fed and takes some pressure off the front end of the US curve. With speculative positioning still leaning toward a hawkish Fed, the US dollar and short-term rates remain vulnerable to further downside surprises in the data.

Technical Picture:

Resistance: 1.4225, today's high, then 1.4248, the recent 14-month high.
Support: 1.4150, today's low, then 1.4024.
Outlook: The soft payrolls print pushed USD/CAD to fresh weekly lows, and a close near 1.4167 keeps the short-term bias pointed lower. A sustained break below 1.4150 would open room toward 1.4024. On the topside, 1.4225 and the 1.4248 cycle high cap the pair. CIBC's fair-value work continues to argue that the risk and reward favours US dollar sellers at current levels.

Week Ahead:

The June FOMC minutes on Wednesday and Canada's June jobs report on Friday are the two focal points for USD/CAD next week. The Bank of Canada decision on July 15 is expected to deliver no change, leaving the pair driven mainly by the US rate outlook and incoming data.

Other Notes:

• Precious metals and other hard assets rallied as rate-hike fears eased, with silver leading the move at roughly 5% on the session, according to CIBC.
• US markets close early this afternoon and are shut Friday for Independence Day, so liquidity is thin and price action may be choppy into the long weekend.
• Soft oil prices remain a structural headwind for the Canadian dollar, even as today's move was driven primarily by the US labour data.