The USD/CAD currency pair opened the week with sharp volatility, reflecting competing narratives between the US jobs market and a deeply concerning Canadian labor market slump.
While Friday’s non-farm payrolls report disappointed investors with a softer-than-expected figure, it was not outright negative. By contrast, Canada posted a staggering loss of 65,500 jobs in August, a contraction that highlights deepening economic stress north of the border.
The divergence between the two economies is pushing traders to adopt a buy-the-dip strategy on USD/CAD, with growing speculation that the pair could extend gains toward the critical 1.40 level in the coming sessions. The brokers at Logirium provide a comprehensive breakdown of this topic in this article.
Economic Backdrop: Canada in the Spotlight
Currency markets are often driven by relative performance, and the latest jobs data underscores a widening gap between the US and Canadian economies.
- The United States may be slowing, but it is not yet contracting.
- Canada, however, is flashing red warning signs with negative employment growth, shrinking domestic demand, and weaker investment flows.
This divergence places the Canadian dollar (CAD) at a disadvantage, particularly in risk-off environments. Historically, when global markets turn defensive, capital tends to seek the US dollar (USD), supported by the unparalleled safety of US Treasuries.
As investors reposition portfolios, money flows away from Canadian assets into American fixed income, amplifying upward momentum in USD/CAD.
Interest Rate Differential and Monetary Policy
Another driver in the USD/CAD story is the interest rate differential. The Federal Reserve has maintained a higher rate stance relative to the Bank of Canada (BoC), making the US dollar more attractive from a yield perspective.
Even if both central banks lean dovish amid slowing growth, the spread remains supportive of USD strength.
For Canadian policymakers, the challenge is compounded by weak domestic data. A labor market shedding jobs restricts the BoC’s ability to maintain tighter policy, as higher rates could worsen the downturn.
Conversely, the Fed can still point to a relatively resilient US economy, making it less urgent to pivot aggressively toward rate cuts. This policy divergence adds a fundamental tailwind to the dollar’s bid against the loonie.
Technical Analysis: Key Levels in Play
On the technical front, the USD/CAD pair is holding firm above major moving averages, reinforcing bullish momentum.
- The 200-day Exponential Moving Average (EMA) currently sits near 1.3869, acting as a strong area of dynamic support.
- The 50-day EMA is positioned below, further underpinning the trend and signaling structural support for buyers.
Recent price action suggests the formation of a rounded bottom pattern, a classic reversal signal often seen before sustained bullish extensions. If momentum persists, traders may eye the 1.40 handle as the next psychological barrier.
That said, short-term pullbacks remain possible. However, dips are increasingly being met with buyer interest, reflecting confidence in the broader uptrend. The critical downside level to watch remains 1.35; a break below would negate the bullish thesis and shift sentiment toward consolidation or even correction.
Risk Sentiment and Market Dynamics
Another factor guiding USD/CAD is the broader risk sentiment across global markets. Periods of equity weakness, commodity declines, or geopolitical uncertainty typically favor the dollar due to its status as the world’s reserve currency.
Canada, being heavily tied to commodity exports, particularly crude oil, is often vulnerable in such phases. If risk-off flows intensify, they will likely accelerate capital rotation away from the Canadian dollar and into the US dollar, reinforcing the upward trajectory in USD/CAD.
Chart Outlook: Potential Scenarios
- Bullish Case: A sustained bid above 1.3869 opens the path toward the 1.40 level, with momentum potentially extending to 1.4050–1.41 if buying accelerates.
- Neutral Case: Consolidation between 1.37–1.39 as traders digest upcoming macro data.
- Bearish Case: Only a decisive break below 1.35 would attract significant selling interest, though such a move appears unlikely given current fundamentals.
Conclusion: Dollar Eyes 1.40 Amid Divergence
The USD/CAD exchange rate reflects more than just job numbers; it captures the broader divergence between two neighboring economies moving in opposite directions. With Canada grappling with a steep jobs decline and limited monetary policy flexibility, the loonie faces sustained headwinds.
Meanwhile, the US dollar remains supported by relatively stronger fundamentals, higher yields, and its global safe-haven status.
Technically, as long as USD/CAD holds above the 1.35 threshold, the path of least resistance points higher. With momentum building and risk sentiment tilting defensive, the 1.40 target is firmly in sight.
For traders, the signal is clear: until proven otherwise, dips in USD/CAD are likely opportunities to join the trend, not fade it.
