Sluggish labor market conditions in the US contrast with resilient trends in Canada after another strong headline beat for Canadian data Friday, Scotiabank's Chief FX Strategists Shaun Osborne and Eric Theoret report.

USD bears face key retracement levels

"The news was not entirely positive; jobs gains were marked by quantity rather than quality and while hours worked picked up in the month, the trend remains soft, suggesting sluggish growth momentum. But the unemployment rate fell sharply, wage gains remain elevated and full-time job gains are averaging 26K over the past three months during which period the average consensus estimate for total hiring was effectively flat. This feels like a significant narrative shift for the CAD after a prolonged period of tariff-driven doldrums."

"Markets have moved quickly to price in the start of the BoC tightening cycle late next year compressing spreads and boosting the CAD. If Scotia’s rate calls are correct (100bps of cuts from the Fed and 50bps of BoC tightening over the next 12 months, narrowing the policy spread from 175bps currently to 25bps), market-driven spreads have more work to do. The CAD is holding on to Friday’s gains—its best 1-day rebound since April—and is trading very close to our fair value estimate (1.3801) this morning. Expect the CAD to remain well-supported on minor dips."

"USD losses late last week broke the back to the bull trend in funds that got underway mid-year. Spot losses have effectively met the objective of the 1.4140 double top that formed in Nov and push a little below the 50% retracement (1.3840) of the Jun/Nov rally. Shorter-term trend momentum signals are USD-bearish, adding to pressure on the USD. Losses have the potential to extend to the mid-1.37s—61.8% retracement at 1.3766 and a collection of lows from August and September at 1.3750/55. Resistance is 1.3975/1.4025 now."