USD rebounds after stronger US employment growth at start of 2026

USD: Pick-up in employment growth helps dampen downside risks

The US dollar has rebounded since the release yesterday of the stronger than expected nonfarm payrolls report for January. It has helped to lift the dollar index back above the 97.000-level encouraged by the scaling back of Fed rate cut expectations. The yield on the 2-year US Treasury bond has increased by around 5bps. Market participants are less confident that the next Fed rate cut will be delivered at the June FOMC meeting when the new chair is likely to be in place. The hawkish repricing was driven by the stronger employment data for January which revealed that the US economy added 130k jobs. It was the strongest monthly increase in nonfarm employment since December 2024. Private employment growth was even stronger up 172k in January after adjusting for the -42k drop in government jobs. The stronger January data has fuelled optimism that the labour demand is picking up at the start of this year. It follows significant downward revisions to employment growth in 2025. After the revisions, the US economy added only 311k jobs in 2025. It was the weakest calendar year of job growth since the COVID shock in 2020. The labour market was particularly weak between June and October of last year when employment fell by -90k, but has been picking up over the last three months. 

Evidence of much weaker employment growth last year has provided justification for the Fed’s decision to resume monetary easing the second half of last year when it cut rates three times. However, the recent pick-up in employment growth gives the Fed more breathing room to assess how the labour market and inflation evolve before cutting rates further this year. It is backed up as well by the drop in the unemployment rate to 4.3%. Still, favourable weather conditions and an outsized monthly increase of 124k in health and social care jobs likely flattered headline employment growth in January. Market participants and the Fed will be watching closely to see if labour market continues to strengthen in the coming months. Stronger employment growth would push back against market expectations for further Fed easing this year, although we still expect stronger productivity growth and slowing inflation to provide justification for further rate cuts. Overall, the report has helped to dampen downside risks for the US dollar in the near-term but does not change our outlook for the US dollar to weaken further in 2026.            

US EMPLOYMENT GROWTH PICKS UP AFTER VERY WEAK 2025

Source: Bloomberg, Macrobond & MUFG GMR

CAD: Uncertainty over USMCA trade renewal emerges as downside risk

The Canadian dollar has underperformed over the last 24 hours even after the latest nonfarm payrolls report has helped to ease downside risks for the US economy. The Canadian dollar has softened against the US dollar while other high beta commodity currencies such as the Australian dollar and Norwegian krone have continued to strengthen. The underperformance of the Canadian dollar reflects the re-emergence of trade policy risks for Canada. The pick-up in trade policy was triggered by a report from Bloomberg stating that President Trump is privately weighing musing about exiting the USMCA trade pact he signed up to during his first term in office. According to the report, the president has asked aides why he shouldn’t withdraw from the agreement, though stopped short of flatly signalling that he will do so. US Trade Representative Jamieson Greer has already stated that they would seek to renegotiate parts of the trade agreement as the Trump administration seeks to make terms of the agreement more favourable for the US. He has indicated that the US wants stronger rules of origin for key industrial goods, enhanced collaboration on critical minerals, adjustments to worker protections, and wants to address concerns over dumping.   

The USMCA trade agreement is set for a mandatory review before a possible extension on 1^st July. If all three countries (Canada, Mexico, and the US) all agree to renew the trade agreement, it would remain in force for another 16 years. However, if the agreement is not renewed, it could then trigger annual reviews until the deal expire sin 2036. Any country could announce their intent to withdraw with six months’ notice. Based on President Trump’s past negotiating tactics, it would not be surprising to see the threat of withdrawal used at some point to extract more favourable terms. He previously threatened to leave NAFTA before replacing it with the current USMCA trade deal as well. The USMCA trade deal has helped to shield Canada and Mexico from higher tariffs and they are subject to comparatively low average effective tariffs. A threat from President Trump to withdraw from the USMCA trade deal poses downside risk for the Canadian dollar and Mexican peso in the coming months, although scepticism over whether he will follow through should help limit downside

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Source: Bloomberg & Investing.com