Loonie slips 0.1% as 130,000 new US jobs slash odds of near-term Fed cuts
Stronger-than-expected US jobs data shoved the Canadian dollar lower on Wednesday, reinforcing US rate expectations as the key driver for the loonie despite firmer oil and softer domestic yields.
US employers added 130,000 jobs in January, nearly double the 70,000 economists had expected, and the unemployment rate slipped to 4.3 percent from 4.4 percent, as reported by Reuters.
The surprise reinforced the view that the US Federal Reserve can keep interest rates on hold for longer.
Markets are now pricing in a 94 percent chance the Fed will leave rates unchanged at its next meeting, up from 80 percent the previous day, according to the CME’s FedWatch tool cited by Reuters.
In that backdrop, the loonie traded 0.1 percent weaker at 1.3560 per US dollar, or 73.75 US cents, after a range of 1.3505 to 1.3618.
Kevin Ford, FX & macro strategist at Convera, said “the unexpected strength in the monthly data to start the year caught investors off guard, sparking a bounce in both the US dollar and the Treasury yield curve.”
He added that “recent downward momentum (for USD-CAD) appears effectively capped by this short-term shift in sentiment, as markets have pushed back the timeline for the Federal Reserve's next move.”
The stronger US print also underpinned the greenback more broadly.
The dollar rallied against the euro and Swiss franc as the data pointed to “underlying US economic health.”
Joel Kruger, market strategist at LMAX Group in London, said “the dollar is rallying on the back of a much stronger-than-expected jobs report and firm earnings,” noting that risk assets are also higher as the figures “trim but do not derail expectations for a June Fed cut.”
Rate expectations further out remain fluid.
Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said “there still is some skepticism towards the dollar but recognizing that the market was leading the wrong way ahead of the jobs data.”
He noted that “the market is still pricing in 50 basis points of cuts this year” and said that, if Kevin Warsh is confirmed as Fed chair on time, his first meeting in June would see the odds of a rate cut fall from 97 percent to about 70 percent.
The Bank of Canada has left its benchmark interest rate on hold, mirroring the Fed’s stance, according to Reuters.
In the summary of its January deliberations, Governing Council members said threats to the Fed’s independence had added to global “turbulence and uncertainty.”
They also pointed to this year’s scheduled review of the United States-Mexico-Canada Agreement as another potential risk, after Bloomberg reported that US President Donald Trump is privately musing about exiting the pact.
Scotiabank strategists Shaun Osborne and Eric Theoret wrote that “the president’s misgivings about the trade deal he negotiated is not exactly new news.”
Market moves elsewhere offered some offsets and signals for risk.
Oil, one of Canada’s major exports, settled 1.05 percent higher at US$64.63 a barrel as investors focused on escalating tensions between the US and Iran.
Canadian government bond yields declined across a flatter curve, with the 10-year yield down 2.4 basis points at 3.338 percent, while the spread over the equivalent US Treasury widened to 83.8 basis points in favour of the US note.
