The Canadian dollar weakened to around 1.39 per USD after the release of labor market data from both Canada and the United States. Canadian employment fell by 41,700 in August, defying expectations for a 15,000 increase and reversing a strong gain of 75,100 in July. The softer labor data may reinforce a more dovish bias at the Bank of Canada (BoC).
In contrast, US nonfarm payrolls rose by 162,000, roughly three times the consensus forecast. The stronger-than-expected report heightened expectations for a Federal Reserve rate hike in September. This divergence in economic performance and policy outlook could widen the interest-rate differential between the US and Canada, supporting the US dollar against the loonie.
At its September meeting, the BoC left its key policy rate unchanged at 2.25%, in line with market expectations. However, it emphasized that inflation risks had increased and that new tariffs had introduced greater uncertainty into the growth outlook. The Bank kept its forward guidance flexible, stating it would adjust policy as necessary. Governor Macklem reiterated that policymakers stand ready to raise rates if inflation remains elevated.
