Canadian Dollar steadies as robust US jobs data counter rising oil prices

The USD/CAD pair trades on a flat note near 1.3835 during the early European session on Monday. The pair steadies as stronger-than-expected US jobs data offsets rising crude oil prices. US markets will be closed on Monday for Labour Day.

The US Nonfarm Payrolls (NFP) added 162,000 jobs in August, beating expectations, while the Unemployment Rate held steady during the same period, the US Bureau of Labor Statistics (BLS) showed on Friday.

Market expectations for a Federal Reserve (Fed) rate hike at the September policy meeting have surged dramatically following the US jobs data. Fed funds futures are now pricing in roughly a 60% probability of a hike, according to the CME FedWatch tool.

On the other hand, Canada's economy lost 41,700 jobs in August, Statistics Canada revealed. Meanwhile, the Unemployment Rate in Canada remained unchanged at 6.4%.

“The sharp 41,700 fall in employment in August and further slowdown in wage growth pushes back against the idea that the economy has decisively turned a corner,” said Thomas Ryan, senior North American economist at Capital Economics.

Escalating geopolitical risk in the Middle East could boost crude oil prices and support the commodity-linked Canadian Dollar (CAD). Iran said that it had struck three oil tankers and multiple US-linked ships in the Strait of Hormuz in retaliation for US attacks on its vessels.

Analysts at Scotiabank highlight that the immediate direction for the Canadian Dollar will hinge on the upcoming US labour market release, noting that “the US jobs numbers will largely dictate price action around the 8.30ET release.” They add that, “assuming data are broadly in line with expectations, the CAD may nudge a little firmer,” suggesting scope for a modest Canadian Dollar bid if the figures do not deliver a significant surprise.

In the daily chart, USD/CAD keeps a mild bearish near-term bias as it holds under the 20-day Bollinger simple moving average and the upper band. Price action has retreated from recent highs toward the lower half of the recent volatility envelope, while the Relative Strength Index (14) around 43 stays below the neutral 50 line, suggesting sellers retain the upper hand despite only moderate downside momentum.

On the topside, initial resistance emerges at the 20-day Bollinger middle band around 1.3860, with the upper band near 1.3950 acting as the next cap if buyers attempt a recovery. On the downside, support is seen at the 100-day moving average near 1.3925 only in a broader context but, closer to current trading, the lower Bollinger band around 1.3760 represents the key floor; a daily close below that zone would open the door to a deeper pullback within the broader range.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

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.

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.

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canadas 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.

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 Canadas case is 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.