Canada likely added more jobs in July, but will the data awaken the loonie? – Preview
August 1, 2023 3:27 pm
Employment numbers for July are due out of Canada on Friday (12:30 GMT), which will be the last before the Bank of Canada’s next policy meeting in September. Jobs growth has moderated somewhat in recent months, which might explain why the unemployment rate has started to edge up. The picture in July is unlikely to have been any different so the data might not have much of an impact on rate hike expectations. The Canadian dollar might therefore take its cues from the similarly timed jobs report south of the border.
A goldilocks economy
Canada’s economy has been humming along quite nicely this year following a mild contraction at the end of 2022. GDP expanded by a better-than-expected 0.3% month-on-month in May and the flat growth reported in the prior two months has been revised higher, easing fears of a recession. The icing on the cake, though, has been the rapid decline in inflation, which hit a two-year low of 2.8% y/y in June.
Underlying measures of inflation remain somewhat elevated, however, so the Bank of Canada won’t be celebrating just yet and some of the indicators it will be keeping a close eye on as it tries to predict what will happen to inflation are those for the labour market.
Jobs are on the up, so too is unemployment
After surging at the end of 2022 and in January this year, the increase in employment has moved down a gear. Almost 60k jobs were added in June – a big jump from the prior month when employment fell by 17.3k. Analysts are forecasting a more moderate gain of 21.1k jobs in July.
On the face of it, this keeps the risk to inflationary pressures firmly to the upside, but the picture isn’t so clear. Wage growth cooled to 3.9% y/y in June, with the unemployment rate climbing for the second month to 5.4%. If the forecasts are correct, the jobless rate rose again in July to 5.5%.
Can the BoC afford to pause?
A possible explanation for this contrasting trend is that the labour force is growing because more migrants are entering the country and previously inactive workers are being attracted to rejoin the labour market as conditions become more favourable for them. For the Bank of Canada, this can only be good news as it would mitigate the need to immediately respond to any hot CPI or jobs data with a rate hike.
The BoC was the first major central bank to pause back in January but was forced to resume its rate hikes at its June and July decisions as the economy outperformed its projections. Another rise in September is far from certain, but investors have almost fully priced in a further 25-basis-point increase by January 2024.
As things stand, the BoC can probably afford to sit on the sidelines at its next meeting. Yet, a much larger-than-expected jump in employment could easily add to the urgency to hike sooner rather than later.
US jobs report just as important for the loonie
Such a scenario would be positive for the Canadian dollar, but in the absence of clear signals, the loonie is likely to remain within its recently adopted sideways range against the greenback, unless of course there are surprises in the US nonfarm payrolls report that’s released simultaneously on Friday. The oil-linked loonie has fared better than other commodity currencies this year as Canada is less dependent on China and yet its been benefiting from higher crude oil prices.
Employment numbers for July are due out of Canada on Friday (12:30 GMT), which will be the last before the Bank of Canada’s next policy meeting in September. Jobs growth has moderated somewhat in recent months, which might explain why the unemployment rate has started to edge up. The picture in July is unlikely to have been any different so the data might not have much of an impact on rate hike expectations. The Canadian dollar might therefore take its cues from the similarly timed jobs report south of the border.
A goldilocks economy
Canada’s economy has been humming along quite nicely this year following a mild contraction at the end of 2022. GDP expanded by a better-than-expected 0.3% month-on-month in May and the flat growth reported in the prior two months has been revised higher, easing fears of a recession. The icing on the cake, though, has been the rapid decline in inflation, which hit a two-year low of 2.8% y/y in June.
Underlying measures of inflation remain somewhat elevated, however, so the Bank of Canada won’t be celebrating just yet and some of the indicators it will be keeping a close eye on as it tries to predict what will happen to inflation are those for the labour market.
Jobs are on the up, so too is unemployment
After surging at the end of 2022 and in January this year, the increase in employment has moved down a gear. Almost 60k jobs were added in June – a big jump from the prior month when employment fell by 17.3k. Analysts are forecasting a more moderate gain of 21.1k jobs in July.
On the face of it, this keeps the risk to inflationary pressures firmly to the upside, but the picture isn’t so clear. Wage growth cooled to 3.9% y/y in June, with the unemployment rate climbing for the second month to 5.4%. If the forecasts are correct, the jobless rate rose again in July to 5.5%.
Can the BoC afford to pause?
A possible explanation for this contrasting trend is that the labour force is growing because more migrants are entering the country and previously inactive workers are being attracted to rejoin the labour market as conditions become more favourable for them. For the Bank of Canada, this can only be good news as it would mitigate the need to immediately respond to any hot CPI or jobs data with a rate hike.
The BoC was the first major central bank to pause back in January but was forced to resume its rate hikes at its June and July decisions as the economy outperformed its projections. Another rise in September is far from certain, but investors have almost fully priced in a further 25-basis-point increase by January 2024.
As things stand, the BoC can probably afford to sit on the sidelines at its next meeting. Yet, a much larger-than-expected jump in employment could easily add to the urgency to hike sooner rather than later.
US jobs report just as important for the loonie
Such a scenario would be positive for the Canadian dollar, but in the absence of clear signals, the loonie is likely to remain within its recently adopted sideways range against the greenback, unless of course there are surprises in the US nonfarm payrolls report that’s released simultaneously on Friday. The oil-linked loonie has fared better than other commodity currencies this year as Canada is less dependent on China and yet its been benefiting from higher crude oil prices.
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