USD/CAD Market Update

Current Level: Mid-1.38s (24hr range 1.3785 to 1.3872)

USD/CAD is trading near 1.3851, up 57 pips from Thursday's close of 1.3794, inside a 1.3785 to 1.3872 range. The pair opened at the bottom of that range and moved sharply higher on the 8:30am ET employment releases, which cut in opposite directions. US non farm payrolls came in at 162,000 against roughly 55,000 expected, while Statistics Canada reported a loss of 41,700 positions against a 15,100 gain expected. That combination widened US and Canada front end rate expectations in a single print and reversed the entire decline that followed Governor Waller's comments on Thursday.

Market Overview:

The US dollar is firmer against most G10 counterparts following the payrolls beat. Two year Treasury yields rose 7 basis points to 4.40%, the part of the curve most sensitive to Fed policy, and EUR/USD fell to 1.1591. US equity futures moved lower on the release as traders priced a higher probability of tighter policy this month, per CNBC. The reaction is concentrated at the front end rather than the long end, which is consistent with a repricing of the September decision rather than a change in the terminal rate view. Crude is the one offset for the Canadian dollar this morning, with Brent holding near US$95 and on track for its largest weekly gain since mid July.

US Payrolls Beat Resets the September Debate:

The Bureau of Labor Statistics reported 162,000 jobs added in August, the strongest monthly gain since March, against a Dow Jones consensus of 53,000, per CNBC. The prior two months were revised up by a net 55,000, with July moving from a 23,000 loss to a 21,000 gain. The unemployment rate held at 4.1% as expected and the participation rate rose to 61.6% from 61.4%. Average hourly earnings rose 0.3% month over month and 3.1% year over year, slightly above the 3.0% consensus. One caveat is worth flagging for anyone reading the headline alone. Roughly 93,000 of the 162,000 gain came from food services and drinking places, up 59,000, and local government education, up 42,000, which makes the underlying private sector picture less emphatic than the top line.

Canadian Data/Outlook:

Statistics Canada reported a loss of 41,700 positions in August, a sharp reversal from July's 75,100 gain and well short of the 15,100 consensus. The unemployment rate held at 6.4%, matching estimates. The composition is weaker than the headline. Full time employment fell 35,900 while part time roles declined 5,800, and losses were concentrated in business and building support services at 20,000, public administration at 9,000, natural resources at 8,000 and utilities at 6,000. Manufacturing was the exception with a 22,000 gain. Average hourly wages for permanent employees rose 2.0% year over year, down from 2.8% in July and 3.3% in June, per TD Economics. That wage deceleration matters more than the job count for policy. The Bank of Canada held at 2.25% on Wednesday for a seventh consecutive meeting and Governor Macklem flagged inflation risks from the Middle East conflict and US trade tensions, but this report removes most of the case for a hike at the October 28 decision. Markets now expect the Bank to stay on hold into the new year.

Fed Watch:

CME FedWatch now shows a 52.6% probability of a 25 basis point hike at the September 16 FOMC, up from 49.4% on Thursday, with the balance on a hold at 3.50% to 3.75%. No cut is priced at any horizon. The move is smaller than the payrolls surprise alone would suggest, which reflects the composition issue noted above and the fact that Governor Waller said Thursday he would favour leaving rates unchanged if inflation pressures continue to ease. Waller also said he would consider a hike if the August CPI report comes in hot. That report lands next Friday, September 11, and is now the decisive input for the meeting five days later. Consensus for August CPI is still forming, with July at 0.1% month over month and 3.4% year over year on the headline, and 0.2% and 2.5% on core.

Technical Picture:

Resistance: 1.3872, today's high and the level that capped the post payrolls move. Above that, 1.3941, the September 2 high and the top of this week's range.
Support: 1.3785, today's low and the pre release base. Below that, 1.3765, Thursday's low and the low for the week.
Outlook: The pair has spent the past six sessions failing to hold above 1.39 and failing to break below 1.3765, a band of roughly 175 pips. Today's move takes it back to the middle of that band rather than through either edge, so the range remains intact until CPI. A close above 1.3872 opens the September 2 high at 1.3941, and a decisive break there would put the 1.3950 area in play. A reversal back under 1.3785 would signal the market is discounting the payrolls beat on composition grounds.

Week Ahead:

Next week is front loaded onto the US inflation calendar. PPI on Thursday and CPI on Friday are the last two prints before the FOMC, and Waller has said explicitly that CPI will drive his vote. For USD/CAD the practical implication is that this week's range should hold into Thursday, with the risk of a directional break concentrated in the September 10 and 11 window. The ECB decision is the one non US event with cross rate consequences, since a hike to 2.65% against a Fed that holds would pull EUR/USD higher and take some broad support out of the US dollar.

Other Notes:

• Brent crude is near US$94.80, down about 0.8% on the session but up roughly 6% to 7% on the week, its largest weekly gain since mid July, per Reuters. WTI is near US$90.40. Renewed US and Iran exchanges and record US diesel prices drove the move, and ANZ raised its short term Brent forecast to US$95.
• The Canadian wage print at 2.0% year over year is the softest of the current cycle and is the single number most likely to shape the Bank of Canada's October communication, more than the headline job loss.
• US and Canada front end rate differentials widened on both legs at once today, a stronger driver of USD/CAD than either report in isolation. Firmer crude is the only meaningful offset currently supporting the Canadian dollar.