USD/CAD flattens around 1.3770 ahead of delayed US NFP data

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The USD/CAD pair trades in a tight range around 1.3775 during the Asian trading session on Tuesday.

USD/CAD trades flat around 1.3770 in the countdown to the US NFP data for October and November.
The US Unemployment Rate is expected to have remained steady at 4.4% in November.
Canada’s headline and core CPI rose steadily by 2.2% and 2.9% year-on-year, respectively.

The USD/CAD pair trades in a tight range around 1.3775 during the Asian trading session on Tuesday. The Loonie pair consolidates as the US Dollar (USD) remains on the defensive ahead of the delayed United States (US) Nonfarm Payrolls (NFP) combined report for October and November, which will be published at 13:30 GMT.

As of writing, the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, wobbles near the eight-week low around 98.15.

Investors will pay close attention to the US NFP data to get cues about the current status of labour demand. The data will significantly influence market expectations for the Federal Reserve’s (Fed) monetary policy outlook in the near term, as the central bank has reduced its interest rates by 75 basis points (bps) to 3.50%-3.75% this year, mainly due to weak job market conditions. Economists expect the US Unemployment Rate to have remained steady at 4.4% in November.

Apart from the US NFP data, other major highlights of the day will be the Retail Sales data for November and the preliminary S&P Global Purchasing Managers’ Index (PMI) data for December. Month-on-month Retail Sales are expected to have grown steadily by 0.2%.

Meanwhile, the Canadian Dollar (CAD) trades broadly calm as Canada’s Consumer Price Index (CPI) data for November has shown steady growth. The CPI report on Monday showed that the headline inflation grew steadily by 2.2% on an annualized basis, slower than estimates of 2.4%. Bank of Canada (BoC) CPI – which excludes the eight most volatile items – rose steadily by 2.9%.

In the monetary policy statement last week, the BoC stated that the “underlying inflation is around 2.5%”, but will broadly remain close to the 2% target as “economic slack would roughly offset cost pressures linked to trade reconfiguration”.

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

How does Nonfarm Payrolls affect the US Dollar?

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

How does Nonfarm Payrolls affect Gold?

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.