The Canadian dollar weakened sharply on Friday after disappointing domestic employment data contrasted with a stronger-than-expected U.S. jobs report. The divergence pushed the U.S. dollar higher and ended the loonie’s recent run of gains.
USD/CAD traded near 1.3862, up around 0.5% on the day. Earlier in the session, the pair had fallen below 1.38 before reversing higher as investors reacted to the contrasting labour-market reports from Canada and the United States.
Canada Jobs Report Misses Expectations
Canada’s economy lost 41,700 jobs in August, according to Statistics Canada. Economists had expected employment to rise by roughly 15,000.
Despite the decline in jobs, the unemployment rate remained unchanged at 6.4%. Meanwhile, the employment rate slipped by 0.1 percentage point to 60.8%.
The weak report increased pressure on the Canadian dollar because it may make it more difficult for the Bank of Canada to maintain a hawkish policy stance.
Alex Tsepaev, Chief Strategy Officer at B2PRIME Group, said the sharp deterioration in Canada’s labour market could continue weighing on the loonie in the coming weeks. Falling employment and slower wage growth may strengthen the case for a more accommodative Bank of Canada.
Weak Labour Market Adds Pressure on the Loonie
The employment report showed weakness across several areas of the Canadian economy.
Employment among young people fell by 19,000, while core-aged workers recorded a decline of 16,000 jobs. Services-producing industries also lost positions.
Manufacturing, however, provided one positive signal by adding 22,000 jobs during the month.
Wage growth also slowed. Average hourly wages increased 2% year over year, down from a 2.8% annual increase in July.
Slower wage growth could reduce inflationary pressure and give the Bank of Canada more flexibility when considering future interest-rate decisions.
Strong US Payrolls Boost the Dollar
The Canadian report came alongside a much stronger U.S. labour-market update.
U.S. employers added 162,000 jobs in August, while the unemployment rate remained steady at 4.1%.
The stronger U.S. employment figures reinforced expectations that the Federal Reserve may have less urgency to cut interest rates.
Tsepaev said resilient U.S. employment could increase the likelihood that the Fed keeps interest rates higher for longer. At the same time, weaker Canadian data could push monetary policy expectations in the opposite direction.
This widening difference in interest-rate expectations is supportive of the U.S. dollar and negative for the Canadian dollar.
Bank of Canada and Fed Outlook Diverge
The growing economic gap between Canada and the United States has become an important driver for USD/CAD.
A weakening Canadian labour market could give the Bank of Canada more reason to maintain an accommodative policy stance. In contrast, continued strength in U.S. employment may encourage the Federal Reserve to remain cautious about cutting rates too quickly.
As a result, interest-rate expectations between the two countries could continue influencing the Canadian dollar over the coming weeks.
Recent Canadian Dollar Gains Reverse
The loonie entered Friday with positive momentum after gaining during recent sessions.
A weaker U.S. dollar and supportive oil prices had helped commodity-linked currencies, including the Canadian dollar.
However, the latest employment data quickly changed market sentiment. Investors shifted their attention toward the growing difference between the strength of the U.S. and Canadian economies.
That change in expectations triggered a sharp rebound in USD/CAD after the pair had briefly traded below the 1.38 level.
US Tariffs Add Another Risk for Canada
Canada’s labour-market report also highlighted broader concerns about the economy as new U.S. tariffs begin affecting trade-sensitive industries.
Statistics Canada noted that industries heavily dependent on exports to the United States continue to face an uncertain economic environment.
New tariffs could increase those risks, particularly for sectors that rely heavily on U.S. demand.
If labour-market weakness continues while trade pressures increase, expectations for Bank of Canada policy could become even more dovish. That scenario could keep the Canadian dollar under pressure against the U.S. dollar.
