• The US Dollar holds firm after a mixed US employment report, while monetary policy expectations remain cautious.
• The Canadian Dollar is weighed down by weaker Oil prices and expectations of increased supply.
• Markets continue to price in a near-term hold by the Federal Reserve, despite political calls for lower rates.

USD/CAD trades around 1.3900 on Friday at the time of writing, up 0.25% on the day, supported by a combination of macroeconomic factors favoring the US Dollar (USD) and weighing on the Canadian Dollar (CAD).

The Greenback finds support following the release of mixed labor market data in the United States (US). Nonfarm Payrolls (NFP) rose less than expected in December, while the Unemployment Rate declined and wage growth accelerated. Taken together, these figures point to a labor market that is gradually cooling but remains relatively resilient, reinforcing expectations of a cautious approach from the Federal Reserve (Fed). Markets largely expect the US central bank to keep interest rates unchanged at the January meeting, while still leaving the door open to a gradual easing path later in the year, as reflected in futures pricing.

At the same time, the Canadian Dollar remains under pressure amid persistent weakness in Oil prices, a key driver of Canada’s terms of trade. The prospect of increased Venezuelan Oil exports to the United States has raised concerns about greater competition for Canadian Crude, particularly heavy Oil. This could weigh on Canada’s energy revenues and limit the Canadian Dollar’s appeal against the US Dollar.

On the domestic front, signals from the Canadian labor market point to an uneven recovery. According to RBC, modest job gains and a higher Unemployment Rate reflect a gradual but choppy improvement in economic conditions. This assessment is broadly aligned with the Bank of Canada’s (BoC) current wait-and-see stance on interest rates, which provides little immediate support to the Canadian currency.

Against this backdrop, the divergence in momentum between the United States and Canada, combined with unfavorable Oil market dynamics, continues to favor a bullish bias in USD/CAD in the near term, with market participants closely watching upcoming macroeconomic data and monetary policy signals on both sides of the border.