Loonie stays under pressure ahead of Canadian jobs numbers – Preview
October 4, 2023 2:27 pm
Canada’s economy likely added fewer jobs in September as labour market cools
But will it sway odds of further BoC rate hikes?
Local dollar struggles at 6-month low ahead of Friday’s data due at 12:30 GMT
A rough patch
The Canadian economy has been going through a rough patch since the end of 2022, contracting in Q4 before bouncing back in the first quarter of 2023 only to shrink again in Q2. Year-on-year growth has stayed positive during this period, but economic momentum is clearly in a downward trajectory.
The labour market has also hit the rocks, as the unemployment rate has crept up to 5.5%, having hit a post-pandemic low of 4.9% in 2022. However, on balance, the economy continues to add jobs, as was evident by the near 40k jobs created in August. The expected figure for September is half that at 20k.
In and out of pause
Whilst such a reading would underscore the trend of a slowing economy, neither would it raise any alarm bells. The Bank of Canada went back into pause mode in September after hiking twice over the summer, but it maintained its tightening bias. Markets see the Bank hiking rates one final time by 25 basis points by April 2024, as inflationary pressures have started to resurface following the latest spike in energy prices.
Unless Friday’s employment print is shockingly bad or shockingly strong, the data will probably not stir a huge reaction in investors and the focus will be on the September CPI report that’s due in two weeks’ time. Canada’s consumer price index has jumped from 2.8% in June to 4.0% in August, with core measures also ticking up.
A further rise in inflation would add pressure on policymakers to hike again even as they fret about overtightening. Although the risk of a recession remains low for now, especially as the price of Canada’s main export – crude oil – is heading higher again, the Bank of Canada has been one of the most aggressive in this tightening cycle, and like the Fed, is concerned about the lagged effects of monetary policy.
BoC policy is of little boost for the loonie
However, for the moment, there aren’t any overly worrying signs pointing to an imminent downturn, and even the slump in the housing market appears to be bottoming out. This suggests the BoC is unlikely to drop its tightening bias until either economic conditions have significantly worsened or inflation has resumed its decline towards 2%.
All this should ideally be supportive for the Canadian dollar, but the ongoing uncertainty over the global economic outlook hasn’t done the risk-sensitive currency any favours. Moreover, with the American economy in somewhat better shape and the greenback additionally offering safe-haven attributes, the loonie hasn’t been able to shine against its US counterpart.
Dollar/loonie just poked above the 1.37 level, reaching a six-month peak. A fresh move towards February’s high of 1.3861 is possible in the near term if the US dollar can extend its bullish streak. However, should the pair reverse back down again, the 61.8% Fibonacci retracement of the October 2022-July 2023 downtrend at 1.3638 could provide initial support. A steeper selloff would turn the spotlight on the 50-day moving average just above the 1.35 level.
Canada’s economy likely added fewer jobs in September as labour market cools
But will it sway odds of further BoC rate hikes?
Local dollar struggles at 6-month low ahead of Friday’s data due at 12:30 GMT
A rough patch
The Canadian economy has been going through a rough patch since the end of 2022, contracting in Q4 before bouncing back in the first quarter of 2023 only to shrink again in Q2. Year-on-year growth has stayed positive during this period, but economic momentum is clearly in a downward trajectory.
The labour market has also hit the rocks, as the unemployment rate has crept up to 5.5%, having hit a post-pandemic low of 4.9% in 2022. However, on balance, the economy continues to add jobs, as was evident by the near 40k jobs created in August. The expected figure for September is half that at 20k.
In and out of pause
Whilst such a reading would underscore the trend of a slowing economy, neither would it raise any alarm bells. The Bank of Canada went back into pause mode in September after hiking twice over the summer, but it maintained its tightening bias. Markets see the Bank hiking rates one final time by 25 basis points by April 2024, as inflationary pressures have started to resurface following the latest spike in energy prices.
Unless Friday’s employment print is shockingly bad or shockingly strong, the data will probably not stir a huge reaction in investors and the focus will be on the September CPI report that’s due in two weeks’ time. Canada’s consumer price index has jumped from 2.8% in June to 4.0% in August, with core measures also ticking up.
A further rise in inflation would add pressure on policymakers to hike again even as they fret about overtightening. Although the risk of a recession remains low for now, especially as the price of Canada’s main export – crude oil – is heading higher again, the Bank of Canada has been one of the most aggressive in this tightening cycle, and like the Fed, is concerned about the lagged effects of monetary policy.
BoC policy is of little boost for the loonie
However, for the moment, there aren’t any overly worrying signs pointing to an imminent downturn, and even the slump in the housing market appears to be bottoming out. This suggests the BoC is unlikely to drop its tightening bias until either economic conditions have significantly worsened or inflation has resumed its decline towards 2%.
All this should ideally be supportive for the Canadian dollar, but the ongoing uncertainty over the global economic outlook hasn’t done the risk-sensitive currency any favours. Moreover, with the American economy in somewhat better shape and the greenback additionally offering safe-haven attributes, the loonie hasn’t been able to shine against its US counterpart.
Dollar/loonie just poked above the 1.37 level, reaching a six-month peak. A fresh move towards February’s high of 1.3861 is possible in the near term if the US dollar can extend its bullish streak. However, should the pair reverse back down again, the 61.8% Fibonacci retracement of the October 2022-July 2023 downtrend at 1.3638 could provide initial support. A steeper selloff would turn the spotlight on the 50-day moving average just above the 1.35 level.
Related Posts: