USD/CAD trims losses as geopolitics overshadow US CPI and Canadian jobs data

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USD/CAD reverses earlier losses on Friday, as uncertainty surrounding upcoming US-Iran negotiations keeps markets cautious and overshadows US inflation and Canadian employment data, keeping price action volatile.

USD/CAD trims earlier losses as cautious sentiment around US-Iran talks keeps markets volatile.
Geopolitical risks remain the key driver, with fragile US-Iran ceasefire conditions and escalating rhetoric limiting downside in the US Dollar.
US inflation rose in March, while Canada’s jobs data showed a modest rebound.

At the time of writing, the pair is trading around 1.3833 and is on track for its first weekly decline after two consecutive weeks of gains, as a modest improvement in the risk sentiment following the US-Iran ceasefire weighs on the US Dollar (USD), though lingering concerns over the ceasefire’s durability help limit further downside.

The US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is trading around 98.70, heading for its biggest decline since January.

The Canadian Dollar (CAD) strengthened earlier in the American session following the release of employment data, which pointed to a modest rebound in the labor market. Net employment rose by 14.1K in March, recovering from a sharp decline of 83.9K in the previous month, though slightly missing expectations of a 15K increase. Meanwhile, the Unemployment Rate held at 6.7%, coming in below expectations of 6.8%.

From a monetary policy perspective, the latest labor market data is unlikely to materially shift the Bank of Canada’s (BoC) cautious stance. Policymakers kept rates steady at 2.25% at their last meeting and are expected to remain patient as they assess the impact of the recent Oil-driven inflation shock.

In the United States, the impact of rising Oil prices was clearly evident in the latest inflation data. Data released by the U.S. Bureau of Labor Statistics showed the Consumer Price Index (CPI) rose 0.9% MoM in March, accelerating sharply from 0.3% in the previous month. On an annual basis, inflation increased to 3.3% YoY from 2.4% in February, with both readings coming in line with market expectations. The firm headline inflation reading reinforces expectations that the Federal Reserve (Fed) will remain on hold in the near term.

Attention now turns squarely to the upcoming US-Iran negotiations scheduled for this weekend in Pakistan. Iran’s Parliament Speaker Mohammad Bagher Ghalibaf said a ceasefire in Lebanon and the release of Iranian blocked assets must be secured before negotiations can proceed.

Meanwhile, US President Donald Trump told The New York Post on Friday that US warships are being reloaded with “the best ammunition” to resume strikes on Iran if peace talks fail.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.

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