USD/CAD exhibits volatility above 1.3700 on weak Canadian Employment

• USD/CAD shows volatility after a weak Employment report.
• Canada’s labor market was squeezed and the wage growth measure decelerated in July.
• The US Dollar declined on expectations that the Fed will cut interest rates in September.

The USD/CAD pair delivers volatile moves above the round-level support of 1.3700 after the release of the weak Canadian Employment data for July. Statistics Canada reported that the labor market unexpectedly squeezed by 2.8K. Economists expected fresh addition of 22.5K payrolls against lay-off of 1.4K workers in June. The Unemployment Rate rose steadily by 6.4% and remained lower than estimates of 6.5%.

Weak Canadian labor market data has prompted expectations of more rate cuts by the Bank of Canada (BoC). Currently, the BoC has delivered two back-to-back rate cuts by 25 basis points (bps) to 4.5% since June.

Apart from weak payrolls data, annual Average Hourly Wages, a key measure to wage growth that propels consumer spending and eventually influence price pressures, decelerated to 5.2% from the former release of 5.6%. This would also increase speculation of more BoC rate cuts.

Meanwhile, the US Dollar and bond yields have declined as investors expect that the likelihood of the Federal Reserve (Fed) pivoting to policy normalization in September appears certain. Market participants are divided about the size and how much interest rates will be reduced this year.

The US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, corrects from a four-day high of 103.50. 10-year US Treasury yields tumble to near 3.94%

According to the CME FedWatch tool, 30-day Federal Funds Futures pricing data shows that traders see a 56.5% chance that interest rates will be reduced by 50 bps in September. For the entire year, data shows a 100 bp reduction in interest rates by the Fed.

Next week, investors will focus on the United States (US) Producer Price Index (PPI) and the Consumer Price Index (CPI) data for July, which will be published on Tuesday and Wednesday. The inflation data will indicate whether current market expectations for rate cuts are appropriate.

(The story was corrected at 13:09 GMT to say in the first paragraph that "The Unemployment Rate rose steadily by 6.4%, remained lower than estimates of 6.5% not 6.4%.)