Rate-path bets and August tariffs will steer the currency from here, strategists say
Canada's dollar rose to an eight-week high on Friday after a stronger-than-expected jobs report, and currency analysts expect it to hold near current levels for several months before firming over the coming year, according to Reuters.
A Reuters poll of 34 foreign exchange analysts, conducted from July 31 to August 5, put the median forecast at 1.40 per US dollar, or 71.43 US cents, in three months, matching the previous month's survey.
Over 12 months, the analysts expect the loonie to strengthen 2.6 percent to 1.366, the poll found, up marginally from 1.36 in the earlier forecast.
The currency traded 0.6 percent higher at 1.3935 per US dollar on Friday, its strongest intraday level since June 11, and was on track to gain 0.6 percent for the week, Reuters reported.
Canadian employment rose by 75,100 in July, far above expectations for a gain of 16,500, while the unemployment rate fell to a two-year low of 6.4 percent.
The "report suggests that growth momentum seen in the second quarter may have carried on into the start of Q3," Andrew Grantham, senior economist at CIBC Capital Markets, wrote in a note.
Preliminary data show the economy grew 3.4 percent in the second quarter, its best quarterly showing in more than three years.
CIBC Capital Markets expects the currency to stay quiet through the summer.
"We expect USD-CAD to remain very rangebound as trading activity over the summer months tends to die down," said Sarah Ying, the bank's head of foreign exchange strategy.
Many of the drivers that moved the market earlier this year, including enthusiasm around AI and sensitivity to the Middle East war and US tariffs, have since faded, Ying said, while the performance gap between the Canadian and US economies has started to close.
The US labour market moved the other way.
The “world's largest economy” unexpectedly shed jobs in July, and payrolls for the prior two months were revised sharply lower, raising questions about whether the US Federal Reserve will lift rates next month.
"Bond yields struggled for direction immediately after the release, as the better than expected Canadian data contrasted with a much weaker than anticipated US payrolls report," Grantham said.
The Fed has held its rate at 3.50 percent to 3.75 percent, with its next decision due September 15 to 16, according to market reports.
Interest rate differentials have emerged as another major driver, according to Howard Du, a currency strategist at TD Securities.
"As it currently stands, the market continues to expect an imminent Fed rate hike potentially at the upcoming September meeting, while the BoC can afford to stay more patient," Du said.
Swap market data show investors expect the Bank of Canada to hold its benchmark rate at 2.25 percent in the coming months while pricing in close to three hikes by the end of 2027.
Positioning has turned against the loonie.
Speculators have raised their bearish bets on the currency to the highest level among major currencies, Reuters reported, with much of that short building coming before Washington announced 50 percent tariffs on a wide range of Canadian goods last month.
Those duties take effect August 19 and, unlike earlier measures, apply even to goods that qualify for preferential treatment under CUSMA, according to law firm Blakes.
The tariffs cover nearly US$20bn in annual imports, roughly 5 percent of Canada's exports to the US by value, as per the Office of the US Trade Representative.
Currency exposure remains a live question for institutional holders of Canadian assets.
Foreign pension funds and insurers have been buying Canada's federal bonds in record amounts, and such investors often hedge their foreign exchange risk, leaving them less sensitive than speculators to short-term swings, according to earlier Reuters reporting.
Canadian bond yields rose on Friday across a flatter curve, with the two-year up 2.3 basis points at 2.951 percent and its gap over the equivalent US note narrowing by 8.3 basis points to about 123 basis points in favour of the US security.
Oil, one of Canada's largest exports, traded 0.5 percent higher at US$77.64 a barrel as investors weighed signs that Gulf states and Iran were nearing a deal to reopen the Strait of Hormuz.
