- The Unemployment Rate in Canada is expected to tick higher in January.
- A positive surprise could prompt the Bank of Canada to delay rate cut plans.
- Further cooling of the labour market could put the Canadian Dollar under pressure.
Statistics Canada is scheduled to release the Canadian Labor Force Survey report at 13:30 GMT on Friday. Consensus among market participants expect the labour market report to come in on a mixed tone, somehow reinforcing the latest decision by the Bank of Canada to maintain its interest rates unchanged.
After holding its interest rates at 5.00% for the fourth consecutive meeting in January, the Bank of Canada suggested at that meeting that it is still premature to start considering reducing the bank’s interest rates as policy makers need more progress in key fundamentals to begin thinking of interest rate cuts. The bank maintained the key interest rate at 5.0% during its September policy meeting.
At the latest event, the BoC kept further tightening on the table in case inflationary pressure regains traction. On Tuesday, Governor Tiff Macklem said that “the policy interest rate at 5% is the level we believe is necessary to alleviate the remaining pressure from inflation”, while he mentioned that the discussion regarding future policy is transitioning from questioning whether monetary policy is restrictive enough to deliberating on how long to uphold the current stance.
It is worth recalling that inflation figures tracked by the Consumer Price Index (CPI) rose at an annual rate of 3.4% in the last month of 2023, bouncing to levels last seen in May of the last year.
According to Statistics Canada, the economy experienced a marginal gain of 0.1K jobs in December, extending the streak of job creation for the sixth consecutive month since the drop in employment was recorded in July (-6.4K).
Still around key indicators, Canadian Gross Domestic Product (GDP) unexpectedly contracted by an annualized rate of 0.3% in the October-November period following a 0.3% expansion in the previous quarter and a 0.6% gain in Q1 2023.
What to expect from the next Canadian Unemployment Rate print?
The spotlight remains on the forthcoming Canadian labor market report, particularly wage inflation data, which could exert some influence on the BoC’s plans to start trimming its policy rates.
Economists anticipate a slight uptick in Canada’s Unemployment Rate to 5.9% in January, up from December’s 5.8%. In addition, it is expected that the economy will add 15K jobs during the last month, following a marginal 0.1K gain in the last month of 2023. Average Hourly Wages, a metric closely monitored by the Bank of Canada, increased by 5.0% in July compared to the previous year.
From the BoC’s Minutes released on February 7, rate-setters voiced their apprehension regarding sustained wage pressure and short-term inflation forecasts that persist significantly higher than pre-COVID levels. They highlighted that a widened output gap is expected to alleviate inflationary pressures.
When is August’s Canada Unemployment Rate released and how could it affect USD/CAD?
The Canadian Unemployment Rate for December, accompanied by the Labor Force Survey, will be released on Friday at 13.30 GMT.
Should domestic job creation lose traction in line with a moderation in wage inflation, it could persuade markets that the BoC could finally transition to an easing cycle in the relatively short-term horizon. In such a scenario, the Canadian Dollar is likely to face additional selling pressure. Conversely, if the labour market report delivers an upside surprise, it would reinforce the view that the central bank could keep the current restrictive stance for longer than anticipated, at the same time encouraging the Canadian Dollar to resume its weekly appreciation.
Pablo Piovano, US Session Manager and Senior Analyst at FXStreet, notes, “USD/CAD hovers around the critical 200-day SMA near 1.3480. A sustained drop below this region is expected to open the door to a deeper retracement in the near term, initially targeting the late January lows near 1.3360 (January 31). A subsequent pullback should not see any contention of note until the December lows around 1.3180, although this scenario appears unlikely, as it would need a sudden and sharp deterioration of the outlook for the Greenback.”
On the flip side, Piovano adds, “the upside potential appears so far limited by the transitory 100-day SMA around 1.3555. The breakout of this region should find an immediate target at the December peaks near 1.3620.”
Economic Indicator
Canada Participation Rate
The Participation Rate is the percentage of the total number of people of working age (15 years and over) that is in the labor force (either working or looking for a job). The data provided by Statistics Canada is monthly and seasonally adjusted; this eliminates the impact of seasonal variations and makes it possible to compare data throughout the year.
Employment FAQs
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.