The Canadian dollar is trading on the back foot to start the week owing to weak jobs data in Canada and a stronger-than-expected US non-farm payroll report for July. Since the beginning of the month, the CAD has lost more than 1.2 percent of its value against the US dollar. Overall, the Canadian numbers were dismal: there were 30.6k fewer employment, both full-time and part-time positions were lost, total hours worked decreased by a sizable 0.5 percent in the month, signaling a slow start to Q3 GDP growth, and wage growth was lower than anticipated at 5.4 percent y/y. In addition, the US jobs report revealed higher-than-expected pay growth and stronger-than-expected job gains, which helped support market expectations for a 75bps increase at the September FOMC meeting. In some ways, weaker stocks added to the pressure on the CAD.
Very little room for CAD appreciation
Despite the differences between these two reports, it is unclear if the possibility of a 75 bps increase by the Bank of Canada has materially decreased. Slower wage growth may be encouraging for the Bank as they fight inflation, and a few disappointing jobs reports may only slightly diminish their overall assessment of "very, very tight" labor markets (especially as given the unemployment rate dipped to 4.9 percent). The more significant data release in terms of the forecast for BoC policy is inflation (coming on August 16). Fair value models continue to suggest upside risks for spot and our week ahead range estimator echoes a perspective. In the immediate term, risks may lean more toward turbulent range trading due to the CAD's softening and weakening correlations with stocks and commodities, which may limit USD/CAD advances to the mid to high 1.29 area. Right now, the only thing we can say with any degree of clarity is that there is very little room for large CAD appreciation.
The week ahead
This week, no significant central bank activities or data releases are planned for Canada. The US data run is also somewhat scant, and Wednesday's July CPI report will be the market's primary concern. Following last week's staggering US employment figures, a hot inflation data will raise market expectations for a 75 basis point Fed rate in September. The preliminary August University of Michigan sentiment and inflation predictions survey wraps up the week on Thursday with the release of the PPI data. Daly, Kashkari, and Evans are among the Fed speakers.
This week’s trading range
For the week ahead the USD will remain well-supported on dips to the low/mid 1.28s and expect the 1.2940 area on the topside.
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