The US dollar declines, and the Canadian dollar performs poorly - Views from the Bank of Nova Scotia.

2025-10-06

The overall trading of the US dollar remains weak, but it is still hovering within the recent range. Market attention has shifted to the upcoming US employment report. Sean Osborn and Eric Seorett from Scotiabank provided their analysis.

The dollar is weakening, and the market seems to expect poor employment data.

"Today's star performers are emerging markets and high beta currencies. The Swedish krona, South African rand, and New Zealand dollar stand out particularly. Most stock markets are up, and bond yields have slightly retreated. It appears that investors are betting that weak data will provide ammunition for the Federal Reserve to cut interest rates in October. The U.S. job market is cooling down, and there is no doubt about that. Labor demand is weakening. The latest JOLTS data highlights the issue - the number of unemployed in the U.S. continues to exceed the number of job openings, a situation that has been in place since 2021."

"Slow down? Not very clear. Federal Reserve policymakers are increasingly concerned about the loosening of the labor market. This will affect their course. The market expects non-farm payroll growth to remain moderate, continuing the trend of the previous months. The unemployment rate is likely to stay above 4%. Our forecast is relatively conservative, sitting at the lower end of market expectations. If the data meets expectations, a rate cut at the next FOMC meeting is almost a certainty."

"The swap prices have fully absorbed the 25 basis point rate cut. Therefore, the employment data that meets expectations may bring some pressure to the US dollar, and the dollar index may test the support level. To allow the index to decline further? It requires the data to be really bad, which would trigger expectations for a larger rate cut. If the data unexpectedly turns out strong, the dollar might rebound briefly, but frankly, other challenges will limit the upward space for the dollar, such as weak fiscal policy and concerns about the independence of the Federal Reserve. By the way, Japan's latest labor cash income data shows sustained growth. This is somewhat unexpected and seems to support the Bank of Japan's future tightening of policy."