NFP Countdown Rate Cut Bets Rise as USD Falters and CAD Recovers

The US dollar continues to limp into the new quarter as pressure from both trade policy uncertainty and softer labour market signals keep the greenback under selling pressure. 

After falling to fresh year-to-date lows last week, the DXY now flirts with the 97.00 handle, with the 2-year Treasury yield dipping closer to 3.7% a stark drop from the highs seen earlier in June. 

The key driver here? A shift in tone from Fed officials. Recent commentary from Waller and Bowman hinted that rate cuts could resume as early as July. 

That opens the door to a significant market reaction if Thursday’s Non-Farm Payrolls (NFP) comes in weak. 

Keep in mind Friday is the 4th of July holiday, so Thursday’s data is the last big macro piece before the long weekend.

The jobs report doesn’t need to crash just a softer-than-expected number or a rise in unemployment could give the Fed the green light to act. 

As of now, job growth has already cooled to an average of 124k/month, and unemployment has hovered stubbornly around 4.0–4.2%.

If the NFP misses, expect the dollar to extend its downside particularly vs JPY and NZD, which have already gained ~0.5% overnight. 

Consider shorting USD/JPY or playing upside in NZD/USD on any post-NFP dollar weakness. 

Canada’s Calm After the Trade Storm

The Canadian dollar rebounded swiftly after Trump’s surprise move last Friday to suspend trade talks with Canada over the digital services tax. 

Over the weekend, Canada withdrew the tax paving the way for talks to resume, and with that, USD/CAD quickly reversed from 1.3759 back to the 1.36s. 

From here, the Canadian outlook is more optimistic. Even if a trade deal isn’t reached by the July 9 deadline, most tariffs will likely remain at the current 10% level rather than rising. 

This scenario eases both economic and inflationary concerns.

BoC’s policy path is nuanced. On one hand, a trade deal improves growth prospects. On the other, cooler inflation now at 3.0% core plus rising unemployment (7.0%) give the BoC scope to cut if needed.

The BoC meets on July 30, and with the market pricing in a mild 11bps of cuts, any downside surprise in this week’s Canadian employment data could amplify CAD strength. 

Watch for a dovish tilt and position long CAD ahead of further easing expectations.

Q1: Why is the US dollar under pressure right now?
A: The greenback is weakening due to two major factors: growing uncertainty around US trade and fiscal policy, and signs that the US labour market is cooling. These concerns have pushed the DXY down near 97.00 and dragged 2-year Treasury yields to around 3.7%.

Q2: What’s the importance of this week’s Non-Farm Payrolls (NFP) report?
A: With the Fed signalling it could cut rates as early as July, this Thursday’s NFP will be crucial. Even a mildly weak report softer job gains or a slight rise in unemployment could tip the Fed toward easing. Markets are hypersensitive to this data, especially ahead of Friday’s US holiday.

Q3: Which currencies are likely to benefit from a weak NFP report?
A: JPY and NZD have already outperformed the USD, gaining ~0.5%. If the NFP disappoints, expect further downside in USD/JPY and more upside in NZD/USD. Traders may want to consider short USD exposure in these pairs.

Q4: What’s going on between the US and Canada regarding trade?
A: After Trump abruptly halted talks due to Canada’s digital services tax, Canada quickly pulled back the policy, reopening negotiations. The Loonie rallied fast, with USD/CAD falling from 1.3759 to the 1.36s.

Q5: Will a trade deal affect the Bank of Canada’s (BoC) next move?
A: Possibly. A deal supports growth but eases inflation concerns, meaning the BoC could justify cutting rates. Inflation has cooled to 3.0% core, and unemployment is already at a cyclical high of 7.0%. Markets are pricing in about 11bps of cuts for the July 30 meeting.

Q6: What’s a smart strategy for trading the Canadian dollar right now?
A: Look to go long CAD (short USD/CAD), especially if Canada’s upcoming employment data shows further softening. It could reinforce expectations for BoC easing and continue supporting CAD strength.

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