USD/CAD forecast: Jobs in focus as loonie hits 6-month lows

Loonie at 1.37 vs. USD as markets digest jobs reports

In early October, the Canadian dollar (USD/CAD) slipped below 1.37 per U.S. dollar, marking a six-month low, with the slide mostly driven by USD strength and a drop in oil prices.

The U.S. labor market showed signs of tightness, as evidenced by higher-than-expected job openings in the JOLTs report, which bolstered the hawkish sentiment within the Federal Open Market Committee (FOMC). As highlighted by Markets.com Chief Market Analyst Neil Wilson in an overview on Wednesday, a range of Federal Reserve officials have issued hawkish comments in recent days. Fed governor Michelle Bowman, for instance pushed for interest rates to remain “higher for longer”:

This not only strengthened the U.S. dollar, but also weighed on energy commodity prices, essential to Canadian exports, reducing demand for the local currency.

Canadian GDP for July was flat, although there were positive signs elsewhere — accelerated wage growth and higher-than-expected trimmed-mean core inflation in September. These figures supported the case for the Bank of Canada (BoC) to maintain its terminal interest rate "higher for longer.”

A weekly preview from the Royal Bank of Canada summarized the dynamics:

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USDCAD news: U.S., Canada jobs reports blow by expectations

Canada's job market performed better than anticipated in September, resulting in the unemployment rate remaining steady for the third consecutive month.

According to Statistics Canada's report on Friday, the country's economy added a net total of 63,800 jobs during the month, following a gain of 39,900 jobs in August. Market projections, as per TD Securities economists, had estimated an addition of 20,000 jobs in September.

Surprisingly, the unemployment rate for September remained unchanged at 5.5%, defying expectations that it would inch up to 5.6%.

The U.S. jobs market was similarly robust, with payrolls expanding by 336,000 on a seasonally adjusted basis, according to the Labor Department's report released on Friday. This rise, nearly double what economists had anticipated, not only reaffirmed the vitality of the labor market, but also underscored the overall resilience of the U.S. economy in the face of various pressures.

The U.S. unemployment rate remained at 3.8% in September, mirroring the August figure, with unemployment approaching historically low levels.

September marked the 33rd consecutive month of job growth, and workers saw their wages increase by 0.2% compared to the previous month and by 4.2% compared to September 2022.

While these wage gains are undoubtedly welcome news for workers dealing with inflation, they may raise concerns among Federal Reserve policymakers, as the Fed has been aiming to curb both wage and price increases by raising interest rates.

Some financial analysts speculate that the continued strength in wage growth and job creation might push the Fed to further increase borrowing costs during its upcoming meeting in early November, potentially hastening an economic downturn.

USDCAD forecasts: Analysts mostly bullish on loonie due to U.S. trade ties

Despite the recent trajectory, analysts are sticking to their bullish forecasts on the Canadian dollar (widely known as the “loonie”) for the coming year, maintaining that the currency is undervalued and could benefit from Canada's close economic ties with the United States, according to a Reuters poll.

ING FX Strategist Francesco Pesole said the loonie’s readings going forward will depend on the jobs readings, adding that the bank favoured CAD strength provided the data was positive:

Scotiabank Chief Currency Strategist Shaun Osborne said USD pressure on the loonie would remain in the near future:

In their USDCAD forecast, economists at Rabobank saw more of the same for the currency pair, writing that the 1.35 level could serve as a potential “magnet”:

In their latest FX Snapshot on October 3, analysts at Citibank Hong Kong were neutral in their short-term Canadian dollar forecast, saying the currency could underperform in the medium term:

Citi’s 3-month CAD forecast was neutral, and even moderately bullish, considering the current 1.37 level placing the USDCAD at a potential average of 1.34. The 6-to-12-month forecast saw USDCAD trading at 1.36.

The bank's long-term projection for USDCAD was bullish, projecting the loonie to regain its strength and trade at a potential average of 1.25 — likely in view of the Fed considering an end to its tightening cycle.

As noted by Jimmy Jean, chief economist at Desjardins Group:

At the time of writing, USD/CAD was trading at 1.3722 (up 0.12% on the day), with the U.S. dollar having appreciated 3.33% against the loonie over the past three months.

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.