Canadian Dollar retreats despite a decline in the US Dollar Index

• Falling Oil prices weigh on the Canadian Dollar, allowing USD/CAD to recover its earlier losses.
• Further BoC tightening is called into question by Canada's weak employment figures.
• Expectations of a December Fed rate rise remain firmly supported by robust US employment figures.

A weakening Canadian labour market leaves the Bank of Canada (BoC) balancing support for employment against the need to curb inflation, while falling Oil prices add to pressure on the Canadian Dollar (CAD). Against that backdrop, USD/CAD finds buyers in Monday’s American session, having traded lower for much of the day.

Having touched an intraday low of 1.4077, USD/CAD is trading near 1.4131 at the time of writing. Its recovery comes despite a 0.45% decline in the US Dollar Index (DXY) on the day.

After finishing last week roughly 12% lower, West Texas Intermediate (WTI) has fallen more than 3% on the day. The Loonie's exposure to Oil price fluctuations reflects Canada's position as a major crude exporter.

Last week’s crude sell-off was fuelled in part by the Democrats’ US midterm election victory. Traders wagered that Congress would put pressure on President Donald Trump to bring the war with Iran to an end. On Monday, Oil has fallen further after Trump downplayed the prospect of fresh strikes. Qatar’s prime minister is visiting Washington, DC, to discuss efforts to end the conflict with Trump and Vice President JD Vance.

Crude is still trading above its pre-war levels despite the decline, leaving inflation risks skewed upwards. A breakdown in talks or an escalation in tensions could send prices higher again.

A third consecutive monthly fall in employment clouds the BoC’s policy outlook

Figures published by Statistics Canada on Friday showed a third successive monthly decline in employment in October. Rather than the expected increase of 13.6K, employment dropped by 4.7K, after falls of 68.3K in September and 41.7K in August. Meanwhile, the Unemployment Rate climbed from 6.5% to 6.7%.

October saw the BoC lift its policy rate to 2.50%, an increase of 25 basis points, and indicate that more rises might be required to prevent higher energy costs from spreading into broader inflation. The disappointing employment figures complicate that decision: although persistent inflation leaves another increase on the table, labour market weakness gives policymakers grounds to hold off.

The Canadian Dollar faces further pressure from a hawkish Fed

An October increase of 165K in US Nonfarm Payrolls (NFP) exceeded the 65K forecast by more than double, as the Unemployment Rate eased to 4.1%. That labour market resilience leaves the Federal Reserve (Fed) scope to increase interest rates in pursuit of its 2% inflation target. According to the CME FedWatch Tool, traders assign roughly an 80% probability to a December rate rise.

Speaking on Monday, Richmond Fed President Thomas Barkin described the US economy as “remarkably stable” and the direction of monetary policy as “straightforward,” while arguing that it was best to proceed “with care.” Inflation, he added, represented the principal risk to the Fed’s mandate.

The next move in the US Dollar could hinge on Tuesday’s US Consumer Price Index (CPI), which may reshape expectations for a December Fed rate rise. An above-forecast reading could bolster the argument for a further increase and support the US Dollar. Conversely, a softer outcome could allow the Canadian Dollar to recover some ground.