Canadian Dollar and Job Market Concerns

In August, Canada posted a loss of 39,700 jobs, supporting economists’ projections for a slump and a halt in the Bank of Canada’s rate rises. The information was issued on a day when the Canadian dollar was falling versus the majority of its main counterparts. The market expected the economy to gain 15K jobs, but the actual result was a third consecutive month of employment losses following -30.6K in July and -40K in June.

“As inflation remains unusually high and central banks continue to raise interest rates in response, wider headwinds for economic development are also gaining strength. We anticipate that these headwinds will eventually be sufficient to cause a minor economic decline in the next year “According to RBC Economics’ Assistant Chief Economist Nathan Janzen.

Before the weekend, the Canadian Dollar lagged behind, sliding 0.25 percent versus the Pound and 0.10 percent against the Euro, but declines against the other G10 currencies were much more dramatic. But advances were recorded against the Greenback, with the greenback-Canadian Dollar conversion rate falling 0.25% on the day to 1.3047.

The jobless rate in Canada suddenly increased to 5.4% from 4.9%, while economists had anticipated a more modest estimate of 5%. In August, wage pressures increased from 5.2% annually in July to 5.4% annually. Hence, the Bank of Canada will continue to have an impetus to hike interest rates in the following weeks, but the likelihood of an economic downturn will moderate the amount and speed of future increases.

This would be consistent with the tone established by the Bank of Canada during its policy meeting, when rates were increased by 75 basis points.

We suspect that today’s sluggish headline figures will alter the Bank of Canada’s pledge to raise interest rates even farther, according to economist Andrew Grantham of CIBC Capital Markets. “The downturn in employment is partially due to a significant decline in education, which is frequently volatile during the summer months.”

“The Bank of Canada may reconsider its perceived resolve to raising interest rates further in light of the dismal headline data. With the big reduction in education jobs perhaps rebounding in the near future and with one more labor force poll to be conducted ahead of the Bank’s October meeting, it is probable that yet another rate rise will be forthcoming before a halt is seen”
he says.

Multiple factors continue to influence the forecast for the Canadian Dollar, notably oil prices, the health of the U.S. economy, wider risk appetite, and Bank of Canada policy. A weakening economy might impact on the Canadian Dollar if it prompts the market to anticipate fewer rate rises from the Bank of Canada.

According to Marc Desormeaux, Chief Economist at Desjardins Bank, the Bank will probably debate the benefits of a 25bp or 50bp rate rise in October, as opposed to the more vigorous movements made in previous sessions.

Lower oil prices and the continuous collapse of global equities markets both operate as headwinds. The Canadian Dollar may remain the second-best performing currency in 2022, but this status is no longer secured for the following weeks.