At the end of last week, USD/CAD updated a three-week price low despite a general strengthening of the U.S. dollar. Bearish dynamics persist on Monday, as the pair is again declining, approaching the 41 figure's base. In the W1 timeframe, it is evident that USD/CAD has been in a downtrend for the second consecutive week. The Canadian dollar has received substantial support, particularly from strong labor market data released last Friday.
The Canadian Non-Farm numbers were noticeably stronger than market expectations, although the absolute increase in employment is not impressive. The key factor was not just the numbers themselves, but the overall signal from the release: the Canadian labor market continues to demonstrate resilience despite ongoing economic risks.
First and foremost, it is important to note the decline in the unemployment rate. The rate decreased from 6.6% to 6.5%, while most analysts expected the unemployment rate to remain at the previous May level in June. Moreover, this is already the second consecutive decline after reaching a multi-month high (6.9%) in the spring, indicating a gradual stabilization of the labor market situation.
In June, the country's economy created 18,200 new jobs, while the consensus forecast was around +10,000. After a very strong May report (+87.8k), many market participants expected a noticeable cooling, but the labor market once again exceeded expectations. Over the past two months, the Canadian economy has added more than 100,000 jobs, significantly alleviating concerns regarding further economic slowdown.
The inflationary indicator has also favored the loonie. Average hourly wages increased by 3.7% year-over-year, following a 3.2% increase in the previous month. This is an important point, as the growth in this indicator signals ongoing internal price pressures driven by consumer demand. As is known, persistent and active wage growth hampers a quick return of inflation to target levels.
The positive market response can be attributed not only to the dynamics of key indicators but also to the release's internal structure. Specifically, the main job growth in June came from the private sector (+32,000 jobs), while the public sector, conversely, cut employment by 31,000. Job creation in the private sector is traditionally seen as a more reliable indicator of economic resilience.
Moreover, it is worth noting the improvement in youth unemployment. The corresponding rate decreased by 0.7 percentage points to 12.7%, helping to "smooth" the overall statistics.
Before the publication of the June Canadian Non-Farm reports, many market participants believed that if the labor market situation worsened, the Bank of Canada might resume discussions about additional easing. However, the June data significantly reduced the likelihood of such a scenario. A strong labor market, a recovery in economic activity, and rising wage growth provide the regulator with "ironclad" reasons to maintain a wait-and-see position for a significantly longer time.
After the release of the June report, yields on Canadian government bonds rose, and the Canadian dollar strengthened across markets, including against the greenback. In fact, traders adjusted their expectations regarding the Bank of Canada's future actions: the baseline scenario is now to maintain a wait-and-see position, while expectations for potential easing have become less pronounced.
The prevailing fundamental backdrop supports further declines in the USD/CAD pair in the medium term. Corrective pullbacks should be seen as opportunities to open short positions.
The priority for short positions is also indicated by the technical analysis. On the four-hour chart, the pair is positioned between the middle and lower lines of the Bollinger Bands indicator and remains below all lines of the Ichimoku indicator, which has formed a bearish "Parade of Lines" signal. On the daily chart, sellers of USD/CAD have breached the support level of 1.4170 (the middle line of the Bollinger Bands indicator), placing the pair between the middle and lower Bollinger Bands lines. The nearest target for the downward movement is around 1.4120 (the lower line of the Bollinger Bands on the H4 timeframe). In this price area, it is advisable to take profits and adopt a wait-and-see position. However, if the bears push through this price barrier, the next target for the downward movement will be the level of 1.4050, which corresponds to the lower line of the Bollinger Bands that coincides with the Kijun-sen line on the daily chart.
