USD/CAD fell sharply for a second day in a row on Thursday as a combination of factors helped to weigh on the US dollar while boosting the Canadian dollar. This USD/CAD drop has occurred immediately ahead of key Canadian jobs data for April to be released on Friday.
On the US dollar front, expectations of rising inflation have cooled recently due to a series of tepid data readings, including US wage growth last week, the producer price index on Wednesday, and the consumer price index on Thursday. Cumulatively, these lower inflation reading have combined to give the US dollar some pause, as expectations of more aggressive interest rate increases from the Federal Reserve have begun to diminish.
Last week, April’s average hourly earnings came in weaker than expected at a +0.1% increase month-over-month against prior consensus expectations of +0.2% (2.6% year-over-year versus the previous 2.7%). Additionally, average hourly earnings for March were revised down. Then, on Wednesday, data showed that US producer prices increased less than expected in April at +0.1%, versus prior expectations of +0.2% and the previous month’s +0.3% reading. Even more crucial for the Federal Reserve, Thursday morning saw consumer prices for April come in lower than expected at +0.2% versus +0.3% expected, and the core CPI (excluding food and energy) increased by only +0.1% against prior expectations of +0.2%. With all three of these major inflation measures showing relative weakness just within the past week alone, the recent US dollar surge should be poised for at least a consolidation or pullback.
Meanwhile, amid the US dollar’s renewed inflation-driven uncertainty, the Canadian dollar has been helped along most recently by a sharp surge in crude oil prices in the aftermath of US President Trump’s announced withdrawal from the Iran nuclear deal this week. While crude oil backed off from new highs on Thursday, the commodity remains supported for now, and the energy-correlated Canadian dollar stands to benefit.
Canadian jobs data scheduled to be released on Friday morning will include employment change and the unemployment rate for April. Currently, 17.8K jobs are expected to have been added to the Canadian economy in April, after the previous month’s better-than-expected 32.3K. The unemployment rate is expected to have remained steady at 5.8%.
From a technical perspective, USD/CAD has spent the past two days retreating sharply from Tuesday’s high just short of the 1.3000 handle, a key resistance level. In the process, the currency pair has dropped back below its key 50-day moving average. The next directional move for the pair will be driven primarily by crude oil prices and whether the US dollar indeed continues to pull back on weak inflation concerns. The Canadian jobs data will also have an impact, but only in the event of a substantial deviation from expectations. With any further surge in crude oil, and if the US dollar remains pressured, USD/CAD has its next downside support barrier around the 1.2700 area. Any breakdown below 1.2700 could open the way for further downside towards the 1.2526 low of mid-April.