Key Takeaways
- The Canadian Dollar is weakening against the US Dollar due to revised Federal Reserve rate cut expectations.
- The latest US labor report showed mixed results, but largely supported the US Dollar.
- Federal Reserve officials’ hawkish comments further reduce the probability of a December rate cut.
- Canadian producer prices rose, yet this did not significantly bolster the Canadian Dollar.
The Canadian Dollar (CAD) is experiencing downward pressure against the US Dollar (USD) this Thursday. The Greenback remains strong as market expectations for a December interest rate cut by the Federal Reserve (Fed) are being scaled back. Currently, USD/CAD is trading near 1.4074, approaching a two-week high, driven by broad USD strength.
The delayed September US labor report presented a mixed, yet generally supportive, picture for the Dollar. Nonfarm Payrolls (NFP) increased by 119,000, significantly surpassing the 50,000 forecast. However, the August figure was revised to a decrease of 4,000, contrasting with the previously reported gain of 22,000. The Unemployment Rate rose slightly to 4.4%, against expectations of 4.3%, while the Labor Force Participation Rate improved to 62.4%.
Factors Influencing USD Strength
Wage data came in softer than anticipated, with Average Hourly Earnings rising 0.2% month-over-month, compared to the 0.3% estimate. On an annual basis, earnings saw a 3.8% increase year-over-year, marginally above the 3.7% forecast. Average Weekly Hours remained stable at 34.2.
Given the postponement of the October jobs report, the September dataset has gained increased importance leading up to the Fed’s December 9-10 meeting. The US Dollar continues to be in demand as markets adjust their outlook on the Fed’s near-term policy. Traders now estimate only a 39% probability of a December rate cut, a notable decrease from approximately 50% just a week ago.
Federal Reserve’s Stance and Inflation Concerns
Hawkish statements from Federal Reserve officials have also reinforced a cautious policy outlook. Cleveland Fed President Beth Hammack cautioned that premature rate cuts could distort market pricing and prolong inflation. Fed Governor Michael Barr emphasized the need for policymakers to proceed carefully, balancing support for the labor market with the critical objective of returning inflation to the 2% target. Barr also expressed ongoing concern that inflation remains near 3%.
💡 These statements highlight the Fed’s commitment to controlling inflation, even if it means maintaining higher interest rates for longer than previously expected by the market.
Canadian Economic Data and the Loonie
In Canada, producer price data for October showed a generally firm picture. Statistics Canada reported that the Industrial Product Price Index (IPPI) increased by 1.5% month-over-month, marking the fifth consecutive monthly rise. The Raw Materials Price Index (RMPI) also climbed by 1.6%, primarily driven by higher prices for metal ores and concentrates. This occurred despite a decline in crude energy prices due to persistent global oversupply. Although this data indicates rising cost pressures within Canada’s industrial sector, it did not significantly bolster the Canadian Dollar (Loonie).
📌 The lack of significant support for the Loonie, despite firm producer prices, suggests that broader global economic factors and monetary policy divergences are currently outweighing domestic inflationary signals.
Main Insights
The Canadian Dollar is under pressure as the US Dollar strengthens, driven by shifting expectations for Federal Reserve interest rate cuts. Mixed but USD-supportive US labor data, coupled with hawkish comments from Fed officials, has reduced the likelihood of a December rate cut. Despite rising producer prices in Canada, the Loonie has not found significant support, reflecting the dominance of broader market dynamics.
