13 Jan 2025

USD/CAD continues its upward trend as market participants anticipate that the Federal Reserve will maintain interest rates at their current level in January. In December, US Nonfarm Payrolls rose by 256,000, surpassing the anticipated 160,000 and the previous month's total of 212,000. The potential decline of the commodity-sensitive CAD may be mitigated by rising oil prices.

USD/CAD has been on an upward trajectory for the fifth consecutive day, trading at approximately 1.4440 during the European session on Monday. This appreciation of the USD/CAD pair can be attributed to the strengthening of the US Dollar (USD), bolstered by strong labor market data from December, which is expected to reinforce the US Federal Reserve's (Fed) decision to maintain interest rates in January.

The US Dollar Index (DXY), which measures the performance of the US Dollar against six major currencies, reached 109.98 during the Asian session on Monday, marking its highest point since November 2022. Furthermore, rising yields are providing additional support for the Greenback, with the yields on 2-year and 10-year US Treasury bonds recorded at 4.41% and 4.79%, respectively, at the time of this report.

Data released on Friday by the US Bureau of Labor Statistics (BLS) indicated that Nonfarm Payrolls (NFP) rose by 256,000 in December, significantly surpassing market forecasts of 160,000 and exceeding the revised November figure of 212,000, which was previously reported as 227,000. Additionally, the US Unemployment Rate decreased to 4.1% in December from 4.2% in November. However, annual wage inflation, as indicated by the change in Average Hourly Earnings, experienced a slight decline to 3.9% from 4% in the previous report.

Furthermore, the Canadian Dollar (CAD), which is sensitive to risk, is under pressure due to increasing apprehensions regarding President-elect Donald Trump's intentions to impose tariffs on imports. Stephen Brown, Deputy Chief North America Economist at Capital Economics, stated, "We are assuming that Trump implements tariffs on Canada this year, which is likely to weigh on the loonie." On Sunday, Canadian Prime Minister Justin Trudeau remarked that while the government does not aim to initiate a trade war with the new administration, it will need to respond if the US enacts tariffs on Canadian products.

Nevertheless, the commodity-linked CAD may mitigate its losses as rising oil prices offer support, considering Canada’s status as the largest oil exporter to the United States. West Texas Intermediate (WTI) has continued its upward trend for the third consecutive session, trading near $77.00 per barrel, just shy of the $77.46 peak reached on Monday, the highest level since October 8. Crude oil prices are on the rise amid increasing concerns over potential supply disruptions due to new US sanctions on Russia's oil sector.