Though the US dollar received a boost late last week after a better-than-expected US jobs report, the Canadian dollar was boosted even more by a Canadian jobs report that far exceeded expectations, much like the previous month. Over 45K jobs were added in Canada in June against a prior forecast of around 11K. Furthermore, the Canadian unemployment rate ticked back down to a better-than-expected 6.5%.
Therefore, although both the US and Canadian headline employment data easily beat expectations, Canada’s positive deviation from previous forecasts was substantially greater than that of the US, which helped prompt a sharp drop for USD/CAD this past Friday.
One major upcoming factor has a clear potential to boost the Canadian dollar further, which would pressure the sharply falling USD/CAD even more. The Bank of Canada (BoC) will issue its interest rate decision on Wednesday. In the run-up to this decision, BoC officials have been providing hints that the central bank may be considering an impending interest rate hike. As a result, the consensus expectation for this Wednesday’s decision is that Canada’s overnight rate will likely rise by 25 basis points, back up to 0.75%. It was almost exactly two years ago that the BoC cut the rate from 0.75% to its current 0.50%.
Recent expectations of rising Canadian interest rates have helped fuel a sustained drop for USD/CAD within the past two months. Key technical points within this drop were a breakdown below a major uptrend channel and the 1.3400 support level in mid-June, a further breakdown below the 1.3200 support level in late June, and then a major breakdown below the key 1.3000 psychological level shortly after.
The noted US and Canadian jobs reports on Friday then fuelled an extended slide below 1.3000. On Monday, the currency pair initially rose but quickly pared those gains to trade near the recent lows. With the likelihood of a BoC rate hike tomorrow, the Canadian dollar has the potential to gain significantly further over the US dollar, which could push USD/CAD towards, and possibly below, the next major support level at 1.2800. With any extended drop below 1.2800, USD/CAD could then begin targeting further downside support around the 1.2650 level.
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