Weakening US Labor Market to Weigh on USD/CAD

USD/CAD WEEKLY FORECAST: MILDLY BEARISH

• USD/CAD has corrected decrease and fallen greater than 400 pips within the final two weeks
• Weak spot within the U.S. labor market and its implications for the Federal Reserve’s financial coverage help the case for additional U.S. greenback weak spot within the close to time period. The technical outlook can be considerably detrimental
• Nonetheless, the bearish USD/CAD’s narrative might change if market sentiment sours on worsening financial information or Financial institution of Canada adopts an ultra-dovish stance

The U.S. labor market cooled sharply in August, damage by weak spot within the leisure and hospitality sector amid one other main coronavirus outbreak. Based on the nonfarm payrolls (NFP) report, the economic system created solely 235,000 jobs, nicely beneath the consensus of 733,000 new hires and the bottom print since January, when COVID-19 vaccinations had been simply starting.

The hiring downshift will possible result in Fed to be extra affected person earlier than lowering asset purchases and virtually definitely stop a September taper announcement. An accommodative-for-longer stance by the central financial institution might probably sluggish the restoration in US Treasury yields and weigh on the broad US greenback index. Theoretically, this might help the Canadian greenback (CAD) and push the USD/CAD trade price decrease within the coming days, accelerating the 400+ pips correction that started two weeks in the past.

Whereas the celebs appear to be aligned for extra USD depreciation, it’s important to intently monitor market sentiment, as considerations about air pockets within the US and Chinese language economic system can set off a flight-to-safety response at any time. For sure, a risk-off episode can spark larger volatility, hit growth-linked commodities (e.g., oil) and weigh on high-beta currencies such because the Canadian greenback.

One other potential headwind for CAD to observe within the week forward is Financial institution of Canada’s price choice. Though no fireworks are anticipated, the establishment might undertake a extra cautious tone on the financial restoration in gentle of the second quarter surprising GDP contraction (Q2 GDP shrank 1.1% annualized vs expectations of a 2.5% enhance) .

With draw back dangers growing for the present quarter, we might see some dovish tweaks within the coverage assertion and maybe an acknowledgement that the output hole will take longer to shut. The financial institution, nonetheless, will chorus from altering the outlook considerably in an effort to remain above the fray forward of the September 20 snap election. On this sense, the October assembly, which comes with new macroeconomic forecasts, may be extra related and market transferring.

USD/CAD TECHNICAL OUTLOOK

USD/CAD has bought off in current days, falling from a eight month excessive of 1.2949 to 1.2518, a drop of greater than 400 pips in lower than two weeks. This leg decrease has pushed the pair beneath a short-term rising trendline and the 200-day transferring common, a bearish sign for value motion. If sellers retain management of the market within the coming week, we have now a main technical help within the 1.2480 space, which corresponds to the 50% Fibonacci retracement of the 2021 rally. If this ground is taken out decisively, we might see a transfer in direction of 1.2422, adopted by 1.2369.

Alternatively, if a rebound takes place unexpectedly, the primary cluster resistance seems within the 1.2650 space. If bulls handle to push costs above this barrier, shopping for momentum might speed up and drive the trade price in direction of the July excessive within the 1.2807 neighborhood.

USD/CAD TECHNICAL CHART

Supply: TradingView

EDUCATION TOOLS FOR TRADERS

—Written by Diego Colman, DailyFX Market Strategist