Data is coming! If Canada's unemployment rate surges again, could the USD/CAD exchange rate jump straight to the 1.42 mark?
2025-11-07 20:22:22
Friday, November 7th. The USD/CAD pair was quoted at 1.4109 in pre-market trading. Overnight, the forex market continued its high-level consolidation pattern following the reassessment of interest rate paths. The US dollar was generally strong, but the momentum was no longer one-sided, and risk appetite remained cautious. The current market focus shifts to the Canadian October employment data to be released at 21:30 tonight; before the data is released, the interplay of price differentials and expectations may amplify the volatility of the USD/CAD pair at its high levels.
From a macro perspective, the Federal Reserve's hawkish communication following its most recent policy meeting drove up US Treasury yields, providing support for the US dollar within the major currency basket. This week, high-frequency US data showed overall resilience: private sector employment indicators were better than expected, and the price index within the services PMI reached a new high, indicating that service inflation remains sticky. It's worth noting that despite the "strong data" narrative, the US dollar did not further amplify its gains, exhibiting characteristics of "sold-out" and difficulty in short-term price increases, often interpreted as a signal of a potential short-term top. Interest rate swap repricing also suggests an implied probability of a December rate cut of over 60%; within this framework, while the dollar bulls have not reversed their stance, a new catalyst is needed to advance the trend.
The macroeconomic narrative in Canada revolves around slowing growth and a policy shift. Last week, the Bank of Canada cut interest rates by 25 basis points as expected, bringing the policy rate to the lower end of its estimated neutral range, while signaling that it may be nearing the end of its rate-cutting cycle, though it still emphasized data-driven policy and flexibility if necessary. Today's October jobs report is expected by the market to show a slight negative growth in employment (approximately 2,500 fewer jobs), with the unemployment rate remaining at a high of 7.1%, the highest level since July 2021. If this expectation is met, it will further reflect a cooling labor market. Regarding wages, average hourly earnings grew by approximately 3.6% year-on-year in September. If this slowdown continues this month, it will weaken inflation stickiness and real income support, thereby increasing market expectations for further easing.
Applying these two macroeconomic drivers to the USD/CAD exchange rate, the interest rate differential and relative growth advantage still favor the US dollar. However, the marginal driver comes from the relative shift in the perception that a strong US dollar may not necessarily become stronger, and a weak Canadian dollar may still be relatively weak. If subsequent US data fails to provide new upward momentum, while Canadian employment data simultaneously weakens, the market may resemble a scenario of "passive strength of the US dollar coupled with active weakness of the Canadian dollar," thus maintaining its high level. Conversely, if Canadian employment recovers more than expected, the unemployment rate falls, or wages accelerate, the market may lower its bets on further interest rate cuts by the Bank of Canada, and the narrowing of interest rate differential expectations will drive a phase of recovery in the Canadian dollar.
Let's break down today's scenario further: If employment turns negative again and the unemployment rate rises, while wages slow both month-on-month and year-on-year, the market will interpret this as further evidence of a cooling labor market. The Bank of Canada's forward guidance of "further rate cuts if necessary" will be interpreted more aggressively, putting pressure on the Canadian dollar and supporting a higher USD/CAD premium due to interest rate differentials. If employment turns positive, the unemployment rate falls, or wages accelerate, the scenario shifts to "marginal tightening of easing," giving the Canadian dollar a breather, and a repricing of the short end of the yield curve may pull prices down. If the data is mixed, such as employment turning positive but wages falling, or employment weakening but the unemployment rate remaining flat, the market is more likely to experience wide fluctuations, awaiting clearer direction from next week's North American data.
The dynamics of interest rate expectations remain a key clue. The market currently rates a high probability of a Fed rate cut by the end of the year, but whether the dollar can continue to benefit depends on whether the interest rate differential and relative growth advantage remain. As long as service inflation stickiness does not ease significantly, the downside potential for short-term real interest rates in the US is limited, and the dollar's medium-term support remains. In Canada, if weak employment and declining price pressures occur simultaneously, investors will tend to believe that the policy range "already or about to reach a neutral-to-accommodative level" remains safe, which will limit the upside of long-term yields and provide insufficient structural support for the Canadian dollar. Weighing these factors, the volatility of the USD/CAD exchange rate is driven more by a combination of short-term interest rate differentials and surprising data releases.
The USD/CAD hourly chart shows that after falling back from 1.4139 to 1.4089, it consolidated sideways around 1.4100, with 1.4070 being a key retracement level since the upward move. The MACD histogram has flattened after narrowing its negative value, with the fast and slow lines converging, indicating weak momentum without a clear divergence. The RSI has fallen from its high to the 40-45 range, indicating that overbought conditions have been released and the market is shifting towards consolidation. If it continues to be resisted at 1.4130-1.4140, the upper resistance zone is effective, and the probability of maintaining the range is high; a break below 1.4089 and approaching 1.4070 would weaken the short-term bullish structure; conversely, a breakout with volume and a hold above 1.4140 would point to a higher range. Currently at 1.4109, in the middle of the range, directional signals are limited.
From a macro perspective, the Federal Reserve's hawkish communication following its most recent policy meeting drove up US Treasury yields, providing support for the US dollar within the major currency basket. This week, high-frequency US data showed overall resilience: private sector employment indicators were better than expected, and the price index within the services PMI reached a new high, indicating that service inflation remains sticky. It's worth noting that despite the "strong data" narrative, the US dollar did not further amplify its gains, exhibiting characteristics of "sold-out" and difficulty in short-term price increases, often interpreted as a signal of a potential short-term top. Interest rate swap repricing also suggests an implied probability of a December rate cut of over 60%; within this framework, while the dollar bulls have not reversed their stance, a new catalyst is needed to advance the trend.
The macroeconomic narrative in Canada revolves around slowing growth and a policy shift. Last week, the Bank of Canada cut interest rates by 25 basis points as expected, bringing the policy rate to the lower end of its estimated neutral range, while signaling that it may be nearing the end of its rate-cutting cycle, though it still emphasized data-driven policy and flexibility if necessary. Today's October jobs report is expected by the market to show a slight negative growth in employment (approximately 2,500 fewer jobs), with the unemployment rate remaining at a high of 7.1%, the highest level since July 2021. If this expectation is met, it will further reflect a cooling labor market. Regarding wages, average hourly earnings grew by approximately 3.6% year-on-year in September. If this slowdown continues this month, it will weaken inflation stickiness and real income support, thereby increasing market expectations for further easing.
Applying these two macroeconomic drivers to the USD/CAD exchange rate, the interest rate differential and relative growth advantage still favor the US dollar. However, the marginal driver comes from the relative shift in the perception that a strong US dollar may not necessarily become stronger, and a weak Canadian dollar may still be relatively weak. If subsequent US data fails to provide new upward momentum, while Canadian employment data simultaneously weakens, the market may resemble a scenario of "passive strength of the US dollar coupled with active weakness of the Canadian dollar," thus maintaining its high level. Conversely, if Canadian employment recovers more than expected, the unemployment rate falls, or wages accelerate, the market may lower its bets on further interest rate cuts by the Bank of Canada, and the narrowing of interest rate differential expectations will drive a phase of recovery in the Canadian dollar.
Let's break down today's scenario further: If employment turns negative again and the unemployment rate rises, while wages slow both month-on-month and year-on-year, the market will interpret this as further evidence of a cooling labor market. The Bank of Canada's forward guidance of "further rate cuts if necessary" will be interpreted more aggressively, putting pressure on the Canadian dollar and supporting a higher USD/CAD premium due to interest rate differentials. If employment turns positive, the unemployment rate falls, or wages accelerate, the scenario shifts to "marginal tightening of easing," giving the Canadian dollar a breather, and a repricing of the short end of the yield curve may pull prices down. If the data is mixed, such as employment turning positive but wages falling, or employment weakening but the unemployment rate remaining flat, the market is more likely to experience wide fluctuations, awaiting clearer direction from next week's North American data.
The dynamics of interest rate expectations remain a key clue. The market currently rates a high probability of a Fed rate cut by the end of the year, but whether the dollar can continue to benefit depends on whether the interest rate differential and relative growth advantage remain. As long as service inflation stickiness does not ease significantly, the downside potential for short-term real interest rates in the US is limited, and the dollar's medium-term support remains. In Canada, if weak employment and declining price pressures occur simultaneously, investors will tend to believe that the policy range "already or about to reach a neutral-to-accommodative level" remains safe, which will limit the upside of long-term yields and provide insufficient structural support for the Canadian dollar. Weighing these factors, the volatility of the USD/CAD exchange rate is driven more by a combination of short-term interest rate differentials and surprising data releases.
Technical aspects
The USD/CAD hourly chart shows that after falling back from 1.4139 to 1.4089, it consolidated sideways around 1.4100, with 1.4070 being a key retracement level since the upward move. The MACD histogram has flattened after narrowing its negative value, with the fast and slow lines converging, indicating weak momentum without a clear divergence. The RSI has fallen from its high to the 40-45 range, indicating that overbought conditions have been released and the market is shifting towards consolidation. If it continues to be resisted at 1.4130-1.4140, the upper resistance zone is effective, and the probability of maintaining the range is high; a break below 1.4089 and approaching 1.4070 would weaken the short-term bullish structure; conversely, a breakout with volume and a hold above 1.4140 would point to a higher range. Currently at 1.4109, in the middle of the range, directional signals are limited.
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