Key Takeaways
- September payrolls fell short, with only 29,000 jobs added and unemployment rising to 4.2%, causing the dollar to decline.
- The likelihood of an October Fed rate hike dropped significantly from 48% to 15%, making a pause more probable despite persistent inflation pressures.
- The Canadian dollar showed some recovery, but the rate gap with US remains significant, limiting potential gains.
- The peso eased against the dollar after US payrolls, though it remains affected by reduced carry exposure and narrowed yield premium.
Dollar falls after payrolls miss
September payrolls delivered a clear downside surprise, with hiring up just 29,000, unemployment rising to 4.2% and prior months revised lower. Wage growth also slowed sharply, easing some concern that labour costs will add to inflation. The increase in participation softens the rise in unemployment, but it does not offset the underlying loss of momentum in hiring.
Treasury yields and the dollar slightly fell as markets cut the probability of an October Fed hike from 48% to 15%. An October pause now appears likely, although the combination of higher fuel costs and firm manufacturing prices leaves the December decision more open. That split is visible in the curve, with the two-year yield down more than 13 basis points this week while the 10-year is broadly unchanged.
The dollar’s resilience is notable given the scale of the rates repricing. DXY remains above 101.5 and is still up around 1% on the week, supported by still elevated longer-term US yields and renewed weakness in the euro amid French political and fiscal concerns. The payrolls report interrupted the dollar’s advance but has not yet reversed the broader move.
The next test is whether weakness spreads from hiring into activity while inflation pressures remain firm. ISM services, JOLTS and jobless claims will help clarify the growth side, while the FOMC minutes and consumer inflation expectations should shape the December debate. For DXY, a break above 102.20 would keep 102.50 in view, while consolidation is expected around 101.5 as key level support waiting for the next catalyst.
Loonie rebounds but rate gap persists
The Canadian dollar found some relief after soft US payrolls pushed Treasury yields and Fed expectations lower, pulling USD/CAD back from Thursday’s high near 1.4263. The move is modest after ten consecutive weeks of CAD weakness, with the pair still holding above 1.42. This remains primarily a US rates adjustment rather than a clear improvement in the Canadian backdrop.
The US-Canada two-year yield spread remains near a cycle-wide 150 basis points, with Canadian two-year yields around 3.20% against 4.72% in the US. That gap continues to favour the dollar even after markets sharply reduced the probability of an October Fed hike. Until Canadian rate expectations rise relative to the US, rallies in the loonie may struggle to extend.
The Bank of Canada also faces a less straightforward case for tightening. Brent slipping below $100 reduces some of the energy-driven inflation pressure, while tariffs and weaker growth prospects argue for caution. The October decision will depend heavily on the Bank’s updated inflation forecasts, but Friday’s developments give policymakers more room to wait.
Canada’s labour report next Friday is the main domestic test after employment fell by 41,700 in August. Another weak reading would weigh on BoC hike expectations and could send USD/CAD back toward 1.4263 and 1.43, while a meaningful recovery would give the loonie a better chance of extending below 1.42. FOMC minutes and US data will also matter through their effect on the yield spread, which remains the clearest driver of the pair.
Peso carry unwind extends above 18
The peso found some relief from softer US payrolls, with USD/MXN easing from 18.43 to 18.14, remaining firmly above 18.00. The pair is still up more than 3% this week after the peso’s worst month since June 2024. Lower Treasury yields helped on Friday, but they have not reversed the broader reduction in peso carry exposure.
Mexico’s two-year yield premium over the US has narrowed to roughly 320 basis points, while one-month implied volatility has risen sharply. That combination makes the risk-adjusted return from holding pesos less attractive, leaving the currency more exposed when global risk appetite weakens. The move above 18.00 suggests investors are no longer willing to rely on carry alone.
September CPI and the Banxico minutes will determine whether the central bank is prepared to defend the remaining yield premium. A firm inflation reading could rebuild support for the peso, while a dovish interpretation would leave USD/MXN vulnerable to another test of 18.432 and potentially 18.50. A move back below 18.00 would require a wider carry spread, lower US yields or clearer progress on trade negotiations.
Market snapshot
Table: Currency trends, trading ranges & technical indicators
Key global risk events
Calendar: September 28 – October 02
All times are in EST
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
