During Friday's Asian trading session, the USD/CAD pair is consolidating below the 1.3800 mark, hovering near a two-week low touched the previous day. Oil prices remain elevated due to geopolitical risk premiums stemming from ongoing US-Iran tensions around the Strait of Hormuz, while a hawkish signal from the Bank of Canada's September meeting is providing additional support for the Canadian dollar. Meanwhile, dovish remarks from Federal Reserve Governor Christopher Waller have nudged the probability of a September rate hike down from 64% to 54%, dragging US Treasury yields and putting pressure on the greenback.

The core factors underpinning the loonie come from two directions: first, crude prices are holding firm on geopolitical risk premiums from the US-Iran standoff in the Strait of Hormuz, directly benefiting Canada as a major oil exporter; second, the Bank of Canada's hawkish lean at its September meeting has reinforced expectations of a relative interest rate advantage over the Fed. At the same time, Fed Governor Waller's dovish stance has swiftly reduced September rate hike odds from 64% to 54%, pushing Treasury yields lower and sending the dollar index to a one-week trough, further easing external pressure on the Canadian dollar.

Market attention has now fully shifted to the upcoming US and Canadian employment reports due later Friday. These two releases are expected to provide pivotal clues for both central banks' policy paths and will likely determine the short-term direction for USD/CAD.

TD Securities: Strong Payrolls Alone Can't Drive Hikes 鈥?Inflation Is the Decisive Factor

TD Securities notes that even a robust nonfarm payrolls figure would only satisfy the "necessary condition" for a rate hike rather than the "sufficient one" 鈥?with inflation remaining the decisive variable. A strong employment report would offer only limited support for the US dollar, unless accompanied by firm inflation data down the line. Should both US and Canadian employment figures come in weak, USD/CAD could slide further toward the 1.3750 area; conversely, if US data proves robust while Canadian numbers disappoint, the pair could rebound above 1.3850.

In its latest commentary, TD Securities draws a clear distinction between the policy weights of employment and inflation. The firm emphasizes that even a solid nonfarm payrolls print would only meet the "necessary condition" for the Fed to act, with inflation data remaining the true "sufficient condition" behind any policy move. Consequently, job growth alone offers only marginal upside for the dollar, unless a synchronized acceleration in inflation follows to create a reinforcing effect.

Key Takeaways

USD/CAD is currently consolidating below 1.3800, with oil prices and the Bank of Canada's hawkish signal underpinning the loonie, while Waller's dovish comments weigh on the dollar. TD Securities argues that strong payrolls are insufficient to prompt a rate hike, as inflation holds the key. In the near term, the pair's trajectory will be driven primarily by the relative strength of US and Canadian employment data, alongside developments in Middle East geopolitical tensions. If both employment reports miss expectations, the loonie could maintain its firm bias; if US nonfarm payrolls significantly outperform, however, a rebound in USD/CAD could be triggered.

(USD/CAD daily chart, Source: Yihuitong)

At 13:28 Beijing time, USD/CAD was trading at 1.3791/92.