**USD/CAD Weakens Below 1.3750 as Markets Await Canadian Employment Data**
*By Pablo Piovano, with supplemental data and market analysis added*
The USD/CAD currency pair experienced a notable decline during the early Asian session on Friday, slipping below the psychological 1.3750 threshold. This movement follows a series of economic developments out of the United States and shifts in investor sentiment, with traders now sharply focused on the upcoming Canadian jobs report as a potential catalyst for the next directional move.
This analysis will explore the underlying causes of the recent USD/CAD movements, examine related macroeconomic indicators from both countries, and preview key data releases, including Canada’s labor market report scheduled for Friday.
## USD/CAD Loses Momentum After US Economic Data
The U.S. dollar initially found support earlier in the week following hawkish comments from Federal Reserve officials and higher-than-expected U.S. labor market data. However, momentum waned after U.S. nonfarm productivity and unit labor costs fell short of expectations on Thursday.
### Key U.S. Economic Data from Thursday:
– **Nonfarm Productivity (Q1):** Increased by 0.3%, below the 0.8% forecast and a sharp drop from 3.5% in Q4 2023.
– **Unit Labor Costs (Q1):** Rose by 4.7%, higher than the expected 4.0%, signaling increasing wage pressures but also reduced corporate profitability.
– **Initial Jobless Claims:** Climbed to 231,000 for the week ending May 4, above the 215,000 estimate and the previous week’s 209,000.
These figures raised questions among analysts about the sustainability of the U.S. labor market’s strength and fueled speculation that the Federal Reserve may not be in a rush to continue lifting interest rates.
Market participants are increasingly betting that the Fed may begin easing monetary policy in 2024, albeit at a more cautious pace. Fed funds futures now suggest around two 25-basis-point rate cuts this year, but the first reduction is not widely expected until the September meeting.
## U.S. Treasury Yields and Dollar Index React
The U.S. Dollar Index (DXY), which tracks the greenback against a basket of six major currencies, edged lower following the release of the soft productivity data. Meanwhile, U.S. Treasury yields dropped as expectations for a prolonged period of high rates continue to recede.
### As of May 9:
– **10-year Treasury yield:** Fell to 4.46%, marking a retreat from recent highs.
– **U.S. Dollar Index:** Slipped to 105.20 from a weekly high of over 105.50.
– **Market rate cut expectations:** FedWatch Tool pricing in over 60% probability of a September rate cut.
## Oil Prices and the Canadian Dollar
The Canadian Dollar, heavily influenced by oil prices due to Canada’s status as a major crude exporter, has seen recent support from a rebound in crude futures.
### Energy Market Highlights:
– **WTI Crude Oil (West Texas Intermediate):** Rose to $79.50 per barrel, recovering from last week’s decline.
– **Supply Factors:** Concerns over potential supply disruptions in the Middle East.
– **Demand Outlook:** Improved economic indicators from China and a prediction by the International Energy Agency (IEA) that global oil demand could rise by 1.2 million barrels per day in 2024.
Higher oil prices often translate into stronger revenues and trade balance data for Canada, offering support to the Canadian Dollar (CAD). The correlation between the Loonie and oil remains a key fundamental driver in the USD/CAD pair.
## Canadian Employment Report in Focus
Traders now await the release of Canada’s April employment report on Friday, which is expected to provide key insights into the health of the labor market and offer further clues as to whether the Bank of Canada (BoC) may
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