The US dollar is at its lowest levels against the Canadian dollar in ten weeks, following a blockbuster Canadian jobs report. USD/CAD is down 70 pips on the day to 1.3886, which narrowly breaks the October low. It's the lowest levels since September 23.
The question is whether this is a gamechanger for the Canadian economy and the loonie. There are still some major headwinds from housing and Trump's tariffs. A steel mill in Ontario announced 1000 layoffs this week and the forestry sector is devastated. Bank stocks though have been hitting record highs and the government is running large deficits.
Most US-Canada trade is still unaffected by tariffs but the USMCA review is mid-2026 and companies are relucatant to invest ahead of what's surely to be an arduous battle. All that should keep the Canadian economy from heating up.
That said, the economy has been resilient so far with jobs gains of 60.4K, 66.6K and 53.6K in the past three months. That's lowered the unemployment rate to 6.5% from 7.1% in what's looking like a turn in the economy. If it is -- and Canadian consumer spending has been robust -- then there's the risk of an inflation problem brewing. That's certainly not something that's priced into markets and would lead to some large gains in the loonie as Bank of Canada rate hikes are priced in.
We are starting to see that following the jobs report today, as the market prices in a 50% chance of a July rate hike and a full hike nearly priced in by year-end 2026. Those are fairly thin markets but before the jobs report, only a small chance of a 2026 hike was priced in.
In the fixed income market, Canadian 2-year yields have jumped to 2.63% from 2.48%
What's at stake for the loonie? The chart above is increasingly looking like a double top and that would target 1.36. I would guess we float towards 1.3725 and the support there until we get some more confirmation on the strength in the economy. One thing I have been noting over the last week weeks is upbeat commentary on Canadian spending in corporate reports, including Walmart. That might have been the early tell.
