USD/CAD Canadian Dollar Higher on Strong Jobs Report Ahead of BoC

The Canadian dollar appreciated on Friday with the better than expected release of the Canadian jobs report. The economy added 45,500 jobs busting forecasts of 10,000 and forcing a drop in the unemployment rate to 6.5 percent. The American jobs report published at the same time usually takes the spotlight at it also showed a 223,000 job gain south of the border but the rising expectations of the Bank of Canada (BoC) hike rates on its July 12 monetary policy meeting pushed the CAD over the USD.

The USD had gains across the board, with the exception of the cross against the Canadian pair. The central bank has changed its neutral stance in June and is now heavily anticipated to start hiking its benchmark interest rate next week. The USD was not able to mount much of a comeback against the euro, but it did score weekly gains of more than 1 percent versus the AUD, GBP and JPY.

The Canadian dollar hit a 10 month high as the jobs report put the market’s estimate of a rate hike by the BoC at near 90 percent probability. Economists remain divided on the actual timing as this is happening too soon after the June 11 comments kickstarted the suddenly hawkish turn by BoC policy makers. In a Reuters poll conducted this week 14 of 31 economists see a rate hike announced on Wednesday, July 12 at 10:00 am EDT. The median of the 31 economist estimate a rate hike happening in the fourth quarter. Even as forecasts are not at consensus it is a big change from the same survey taken in May that pointed to the second quarter of 2018.

Canadian dollar weekly graph July 3, 2017

The USD/CAD lost 0.751 in the last five trading sessions. The currency pair is trading at 1.2871 after the release of employment reports in the US and Canada. The U.S. non farm payrolls (NFP) report showed the US added 220,000 new positions in June, but wage growth remains slow with a 0.2 percent monthly gain. The strong NFP will keep the Fed on target as it looks to raise rates at least once more before the end of the year and start reducing the balance sheet it accumulated during its quantitative easing program.

Canadian jobs surprised to the upside with another strong gain. Canada added 45,000 jobs in June, although less full-time positions than in May but a strong showing that dropped the unemployment rate to 6.5 percent. The loonie appreciated after the release as it adds further speculation that the Bank of Canada (BoC) will hike rates on July 12 after several comments from senior central bank members. The Canadian central bank changed its tune on June 11 and started signalling an upcoming rate hike after the two rate cuts in 2015 and the government’s fiscal stimulus seemed to have done their job. The BoC was not forecasted to hike rates until 2018 as there are still major question marks with oil prices and the NAFTA negotiations in the fall, but the pace of growth in the Canadian economy is giving the central bank the confidence to make a move sooner rather than later and keep up with the Federal Reserve.

The Bank of Canada (BoC) monetary policy meeting will be the highlight of the week. Central bank rhetoric in the developed economies has now taken hawkish tone as the European Central Bank (ECB), Bank of England (BoE) and the Bank of Japan (BOJ) have seen improvement in economic growth. The BoC is ahead of the pack and slightly behind the pack as it carries no quantitative easing program to taper and its benchmark rate is 50 basis points. A 25 basis points in the next meeting would keep it close to the 100–125 basis points of the Fed funds rate.

Oil prices tumbled 3.917 percent this week. The West Texas Intermediate is trading at $44.10 in a volatile week for energy, with prices oscillating between the weekly high of $47.18 and dropping as low as $43.67 as inventories in the US pointed to a larger drawdown than expected but global supply rumoured to be on the rise despite the Organization of the Petroleum Exporting Countries (OPEC) production cut agreement put more pressure on the downside. OPEC members will meet in Russia with other producers that have agreed to cut production to normalize the market. Russia does not appear to want to increase the amount of the cuts, and other producers are asking for the exemptions given to Nigeria and Libya to be finalized.

Oil rigs in the US have started to increase as shale operations take advantage of stable prices at current levels. The diplomatic disagreement between Qatar and other Arab nations leaves in question the unified front of the OPEC as Saudi Arabia’s leadership in the group will be questioned. Weekly inventories regain their normal publication date with US crude stocks to be reported on Wednesday, July 12 at 10:30 am EDT.

Market events to watch this week:

Wednesday, July 124:30am GBP Average Earnings Index 3m/y
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:00am USD Fed Chair Yellen Testifies
10:30am USD Crude Oil Inventories
11:15am CAD BOC Press Conference
Thursday, July 13
8:30am USD PPI m/m
8:30am USD Unemployment Claims
10:00am USD Fed Chair Yellen Testifies
Friday, July 14
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza