Canadian dollar extends losses

The US dollar continues to post gains and is in positive territory at the start of the week. USD/CAD is trading at 1.2934 in the European session, up 0.20% on the day.

Canada unemployment drops

Canada’s April employment report on Friday was steady but not spectacular. The economy added a modest 15.3 thousand jobs, lower than the estimate and well below the March release of 72.5 thousand. The labour market may well have reached its limit, after all the strong gains we’ve seen during the Covid recovery. The number of job vacancies remains high and the unemployment rate fell from 5.3% to 5.2%, both of which reflect a robust labour market and a shrinking labour pool.

The tightening job market is putting further pressure on the Bank of Canada to raise rates at a faster pace than expected. The benchmark rate is currently at an even 1.00%, after the 0.50% hike in April. Governor Macklem has hinted that he could deliver more 0.50% hikes and we could see rates rise to 2% by the end of Q2. Macklem has signalled the rate-hike cycle could be very aggressive, saying that he will lift rates above 3% if necessary, in order to beat back spiralling inflation.

The Canadian dollar remains under pressure, with USD/CAD setting its sights on the symbolic 1.30 line. The Fed is also showing its hawkishness, having just delivered its own oversize 0.50% hike last week. This move was priced in by the markets, but the rate hike and the expectations of more on the way have provided plenty of wind for the sails of the US dollar. USD/CAD hit 1.2950 earlier today, its highest level since December 21^st 2020. For USD/CAD, risk is tilted to the upside, and I expect the pair to put further pressure on the 1.30 line.

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USD/CAD Technical

• There is support at 1.2846 and 1.2777
• Resistance at 1.2979 is protecting the 1.30 level. Above, there is support at 1.3048

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