Canadian Dollar rebounds as dismal NFP data weighs on USD

USD slumps as markets lean toward a September Fed rate cut

The monthly data published by the US Bureau of Labor Statistics (BLS) showed on Friday that Nonfarm Payrolls (NFP) rose by 73,000 in July. This print missed the market expectation of 110,000. On a concerning note, the BLS revised NFP increases for May and June lower by 125,000 and 133,000, respectively.

"With these revisions, employment in May and June combined is 258,000 lower than previously reported," the BLS said in its press release.

Meanwhile, the Unemployment Rate edged higher to 4.2% from 4.1% in June, as anticipated.

The USD came under heavy selling pressure as investors reassessed the probability of a 25 basis points Federal Reserve (Fed) rate cut in September. According to the CME FedWatch Tool, markets are currently pricing in about a 70% chance of a 25 basis points rate cut at the next meeting, up from 33% before the employment data.

Earlier in the day, the White House announced late Thursday that US President Donald Trump has signed an Executive Order increasing the tariff on Canada from 25% to 35%. Canada’s Prime Minister Mark Carney said that they are disappointed with the US' decision to raise tariffs and added that they will remain focused on what they can control, while continuing negotiations.

Canadian Dollar FAQs

What key factors drive the Canadian Dollar?

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.

How do the decisions of the Bank of Canada impact 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.

How does the price of Oil impact the Canadian Dollar?

The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s 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.

How does inflation data impact the value of the Canadian Dollar?

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 Canada’s case is the Canadian Dollar.

How does economic data influence the value of 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.

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