The Canadian dollar experienced a slight decline against its U.S. counterpart on Friday, though it managed to preserve a modest weekly gain. Market participants interpreted stronger-than-anticipated domestic employment data as a factor likely to dissuade the Bank of Canada (BoC) from reducing interest rates in the upcoming monetary policy meeting.
By the close of trading, the loonie had edged down approximately 0.1%, reaching 1.3685 per U.S. dollar, which equated to 73.07 U.S. cents. Despite this marginal fall, the currency remained within a relatively narrow trading band, having moved between 1.3661 and 1.3704 throughout the day. Notably, on the previous day, it had touched an eight-month high of 1.3632 and was set to end the week with a gain of about 0.4%.
The Canadian labor market report, released earlier in the day, was met with cautious optimism. Instead of the anticipated decline of 12,500 positions, the economy had unexpectedly added 8,800 jobs during the last month. However, the data was accompanied by a rise in the national unemployment rate, which climbed to 7%, its highest level in nearly nine years, discounting the temporary surge during the peak of the COVID-19 pandemic.
Analysts pointed out that the job market shift largely involved a transition from part-time to full-time employment, a development that was generally viewed in a positive light. According to commentary offered by Marc Chandler, chief market strategist at Bannockburn Global Forex LLC, this transformation was considered a net positive for the labor market. It was further suggested that such labor market strength would likely dissuade the central bank from taking immediate action to lower interest rates. Although future cuts could still occur, these were seen as more likely to take place later in the year, rather than in the short term.
Investor sentiment appeared to shift in favor of the BoC maintaining its current benchmark interest rate of 2.75% in July. The probability of rates being held steady had risen to 73%, up from 67% before the employment figures were released. Earlier in the week, the central bank had opted to leave rates unchanged for a second consecutive meeting, citing the necessity of closely observing the broader implications of evolving U.S. trade policy before making further adjustments.
Meanwhile, the U.S. dollar saw gains against a basket of major currencies, buoyed by its own set of unexpectedly strong job data. This uptick added additional downward pressure on the loonie, even as domestic factors supported it. The strength of the U.S. economy, particularly in the labor market, was seen as a reinforcing factor behind the Federal Reserve’s more cautious approach to monetary easing.
Oil prices, another significant variable in the equation for the Canadian economy, moved higher on Friday. As one of Canada’s primary exports, the rise in crude prices contributed positively to the loonie’s broader strength over the week. Optimism surrounding ongoing trade discussions between the U.S. and China was identified as a key driver behind the rebound in oil prices. U.S. crude oil futures were reported to be nearly 2% higher, trading at $64.62 per barrel.
In parallel with these developments, yields on Canadian government bonds rose across the curve, mirroring movements seen in U.S. Treasury yields. The 10-year Canadian bond yield increased by 7.2 basis points, reaching 3.327%, which represented its highest level since May 26. The upward pressure on yields was seen as a reflection of reduced expectations for near-term rate cuts and a strengthening economic outlook, both domestically and internationally.
Overall, while the Canadian dollar closed the week with a slight dip, the broader narrative remained positive. The combination of resilient domestic job growth, recovering oil prices, and rising bond yields was interpreted as reinforcing investor belief in the strength of the Canadian economy. With central bank policy decisions looming and global trade negotiations continuing to influence sentiment, both currency and bond markets were expected to remain sensitive to incoming data in the weeks ahead.
