USD/CAD rebounds strongly and approaches 1.3360 on bleak Canadian jobs report

• USD/CAD has shown a solid recovery from the crucial support at 1.3320 following weaker than expected Canadian labor market data.
• The net change in employment in Canada fell by 17,300 and the unemployment rate jumped to 5.2%.
• S&P 500 futures have turned positive after recovering all of their losses, portraying a risk-on mood in the markets.

The pair USD/CAD it has recovered sharply to approach 1.3360 as Statistics Canada has reported disappointing employment numbers (May). The Canadian labor market has posted a decline in payroll figures of 17,300, while the street was anticipating an increase of 23,200. Last month, the Canadian economy created 41,400 jobs. The unemployment rate has risen sharply to 5.2% against estimates of 5.1% and the previous release of 5.0%.

Additionally, the annual average hourly earnings has smoothed out to 5.1% from the previous posting of 5.2%. This would also ease some of the drag on consumer spending.

Given the weakness in the Canadian jobs report, the Bank of Canada may reconsider its intention to continue raising interest rates.

Investors should note that the BoC surprise raised interest rates by 25 basis points (bps) to 4.75% on Wednesday. BOC Governor Tiff Macklem decided to raise interest rates despite the continued moderation of Canadian inflation. Canada’s Consumer Price Index (CPI) stood at 4.4% in April. In the monetary policy statement, Macklem stated that inflationary pressures could turn tight at these levels as consumer spending is resilient. In addition, he kept the doors open to further interest rate hikes.

S&P 500 futures have turned positive after recovering all of their losses before the American session, portraying a risk-on environment in the markets. The diminishing chances of a new interest rate hike by the Federal Reserve (Fed) have improved the attractiveness of risky assets.

The Dollar Index (DXY) has pulled back after failing to extend its rally to near 103.60. Although expectations of a neutral stance on interest rate policy by the Fed for the June meeting are sky high, we will have to be very attentive to the publication of the US CPI data (May), which will be published next week.

According to the preliminary report, headline inflation is expected to ease sharply amid falling oil prices, while core inflation excluding oil and food prices could remain persistent.