USD/CAD reached approximately 1.4240 following the release of employment data from both the US and Canada. The Canadian economy experienced layoffs, with Statistics Canada reporting a decrease of 32.6K workers, contrary to the expected increase of 12K.
The unemployment rate in Canada rose to 6.7%, up from 6.6% the previous month. Average hourly wages increased by 3.5% year-on-year, a deceleration from 4% previously, indicating potential for interest rate cuts from the Bank of Canada.
Us Nonfarm Payrolls Exceed Forecasts
Conversely, the US Nonfarm Payrolls data exceeded forecasts, adding 228K workers compared to an estimated 135K. The unemployment rate in the US increased to 4.2%, while average hourly earnings rose 3.8% year-on-year.
With Friday’s data behind us, pricing across rates and FX derivatives has swiftly adjusted to reflect a shift in expectations. From our side, the divergence in employment prints delivers a clear message: one central bank has more room to ease, while the other has unleashed more questions than answers about the timing of its first cut.
The labour market in Canada not only lost more jobs than anticipated, but wages also cooled noticeably — and this comes after several months where wage stickiness provided the Bank of Canada with justification to hold interest rates steady. Now, that argument begins to fray. Wages rising at 3.5% may still seem elevated, but the direction matters here, and momentum is waning. Macklem and his team have a clearer signal in front of them, likely reinforcing June or July as viable dates for a rate reduction. From the pricing in options and futures, it’s apparent that the market is increasingly settling on a June decision, with a front-loaded path thereafter.
Powell’s Policy Challenges
On the other hand, Powell’s side of the equation proved more complex. Despite a blowout nonfarm payrolls figure – nearly 100K over consensus – the US unemployment rate ticked higher, and the jump in wages wasn’t sharp enough to radically shift policy rate assumptions. That might appear contradictory at first, but it reflects an economy still digesting the lagged effects of prior tightening. For us, the underlying strength in hiring will make the Fed patient – there’s little urgency. Key now is not the jobs added in May, but whether this pace persists into the summer. We suspect the bar for the first cut remains high, with restrictive policy held in place unless inflation softens more decisively.
The move in USD/CAD to 1.4240 wasn’t simply a dollar story. The loonie’s weakness reflects the market re-pricing Canadian yields lower. A short-run overshoot can’t be ruled out — stretched technicals and volatility premiums on the upside may briefly support retracements — but the directional bias aligns well with rate differentials.
For those managing risk or constructing trades around short-term interest rate differentials, this dynamic sets up asymmetry. Vol curves show compressed skew on the CAD side, particularly in the 1-3 month tenor, suggesting options are underpricing the potential for renewed downside in the loonie should rate cuts begin earlier or continue faster than anticipated. Hedging costs remain moderate, and rollover strategies may benefit from negative carry on CAD if spot remains stable above 1.40.
We’ll be watching wage growth revisions closely. As forward-looking labour indicators start to falter, the balance of surprise risk shifts toward even softer Canadian data. Scheduled speeches from both central banks in the coming fortnight may inject more volatility, especially if narrative tone shifts.
One final note — don’t overlook the effect input costs and global demand conditions are having outside of employment. Canadian exporters are already under pressure, which can feed into broader economic weakness. That’s not yet fully priced across cross-asset derivatives. Insight could emerge through trade data next week, especially if inventories start to drag on GDP expectations. Given implied vols have steadied post-NFP, tactical positioning in directional payoffs remains attractive if timed carefully.
