USD/CAD advances as the US-Iran conflict and tensions in the Strait of Hormuz heighten market anxiety. Lowers September rate hike odds following an unexpected decline in Nonfarm Payrolls for July. Rebounding WTI prices may provide underlying support for the commodity-linked Canadian Dollar. USD/CAD recovers after experiencing losses exceeding 0.5% the previous day, currently trading near 1.3950 in the early hours of Monday in Europe. The pair gains ground as the US Dollar strengthens on rising safe-haven demand, driven by heightened geopolitical caution. Middle East tensions persist at a heightened level as the protracted US-Iran conflict transitions into a pivotal diplomatic stage, characterised by significant military confrontations and strategic pressures in the vicinity of the Strait of Hormuz. Tehran has indicated that discussions with Oman regarding the establishment of a secure shipping route thru the strategic waterway are approaching a consensus.
However, it has also warned that any agreement reached will not result in an immediate resumption of operations. Additionally, Iran-backed Houthi militants in Yemen asserted responsibility for a recent assault on Saudi Arabia’s Jazan refinery, while a tanker managed by the Abu Dhabi National Oil Co. was targeted in the Strait. Meanwhile, Tehran has dismissed the prospect of direct negotiations with the United States at this time, pointing to purported violations of the interim peace agreement established in June. On the economic front, US Nonfarm Payrolls unexpectedly declined by 23,000 in July, while significant downward revisions to June’s figures, which fell to 20,000 from an initially reported 57,000, underscore deteriorating labour market conditions. Consequently, the CME FedWatch Tool indicates that markets currently assign a nearly 44% probability to a 25-basis-point rate hike in September, a decrease from 67% the previous week.
Investors are presently directing their attention toward forthcoming inflation reports for additional insights into the trajectory of monetary policy. Despite these favourable conditions for the US Dollar, the upside potential for the USD/CAD pair may be limited by the strength of the commodity-linked Canadian Dollar. Oil prices have rebounded, with West Texas Intermediate trading around $77.20 per barrel as it reduces losses from the previous session. Ongoing uncertainty regarding the reopening of the vital Strait of Hormuz remains a significant factor influencing crude prices, serving as a counterbalance to the strength of the US Dollar. Analysts underline that, “in contrast to the US labour market, the Canadian labour market delivered a very positive surprise on Friday,” with hiring momentum far outpacing expectations.
They note that while “the median Bloomberg consensus forecast had predicted the creation of 20,000 new jobs, roughly 75,000 were actually created,” underscoring the strength of the latest report. In their view, this surge in employment has already fed through to headline indicators, as “in light of these figures, the unemployment rate also fell unexpectedly to 6.4%, its lowest level in two years, marking a decline of half a percentage point over the past three months.” Against the backdrop of improving GDP, PMI and export data, Commerzbank sees this robust labour performance as reinforcing the narrative of a recovering real economy, even if they caution that the upswing remains vulnerable to shifts in US trade policy.
