- The Unemployment Rate in Canada is set to rise a tad to 5.6%, while employment is also expected to grow.
- Strong jobs data and hot wage inflation are critical to rescuing the Canadian Dollar.
- Weak jobs data will ramp up dovish Bank of Canada expectations after Wednesday’s pause.
Statistics Canada is set to publish the Canadian Labor Force Survey report at 12:30 GMT on Friday. Markets are likely to see a continued slack in the Canadian labor market, justifying the Bank of Canada’s (BoC) steady interest rate decision announced on Wednesday.
Having lifted rates by 25 basis points (bps) in June and July, the Bank of Canada left the key interest rate unchanged at 5.0% at its September policy meeting. Still, the BoC kept doors ajar for more tightening should inflationary pressures persist. The central bank acknowledged the recent surge in Canadian inflation but it expressed concern about the economic outlook amidst loosening labor market conditions.
“The Governing Council decided to keep rates at 5.0% given recent evidence that excess demand in the economy is easing, and given lagged effects of monetary policy,” the BoC said in its policy statement.
The economy has lost jobs in two of the previous three months, according to Statistics Canada. Canadian Gross Domestic Product (GDP) unexpectedly shrank an annualized 0.2% in the second quarter and stagnated in July, indicating that the economy could have already entered a modest recession. Meanwhile, the annual inflation rate in the North American economy surged more than expected to 3.3% in July. The Core Consumer Price Index (CPI) stayed stubbornly high at 3.2% in July, against expectations of a 2.8% increase.
What to expect from the next Canadian Unemployment Rate print?
The focus remains on the upcoming Canadian labor market report, especially wage inflation data, which could have a significant influence on the BoC’s next policy decision.
“Tightness in the Canadian labor market has continued to ease gradually, but wage growth remains around 4% to 5%,” the Bank said in its policy statement.
Economists are expecting Canada’s Unemployment Rate to edge a tad higher to 5.6% in August, compared with a rise to 5.5% in July. The economy is expected to add 15K jobs in the reported month after unexpectedly shedding 6.4K jobs in July. Average Hourly Wages, a figure the Bank of Canada watches closely, rose 5.0% in July from a year ago.
About the upcoming employment data, analysts at TD Securities (TDS) said: “we look for the economy to add 20k jobs in August, slightly below the 6m trend and well below levels required to keep up with population growth, with a partial rebound in construction helping to drive the headline print as hiring intentions fade. A 20k print would leave the UE rate stable at 5.5%, while softer wage growth (-0.6pp to 4.4%) should give the report a dovish tone.”
When is August’s Canada Unemployment Rate released and how could it affect USD/CAD?
The Canadian Unemployment Rate for August, accompanied by the Labor Force Survey, will be released on Friday at 12.30 GMT. Following the BoC interest rate decision, traders look forward to the Canadian jobs data for a fresh direction in the USD/CAD pair.
If there is another job loss in August along with cooling wage inflation, it could convince markets that the BoC is done with its tightening cycle for the year. In such a case, the Canadian Dollar is likely to come under additional selling pressure. On the other hand, higher-than-expected employment creation and sticky wage inflation could reinforce expectations of another BoC rate hike this year, rescuing the CAD from six-month lows against the US Dollar.
Dhwani Mehta, Asian Session Lead Analyst at FXStreet, notes key technicals to trade USD/CAD on the data release. The 14-day Relative Strength Index (RSI) indicator on the daily chart has eased from the overbought territory, justifying the pullback in USD/CAD from half-yearly highs of 1.3694. Buyers need a daily closing above the latter to extend the uptrend toward the 1.3750 psychological barrier, above which the March 24 high of 1.3804 will be put to test.”
In case, the USD/CAD correction gathers traction after the employment data, the 1.3600 round figure will be challenged. Deeper declines will target the bullish 21-day Simple Moving Average (SMA) at 1.3563.”
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.