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Anticipated Increase in Canadian Unemployment Rate

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Anticipated Increase in Canadian Unemployment Rate

  • The Unemployment Rate in Canada is expected to rise further in July.
  • Further cooling of the labour market could favour extra rate cuts.
  • The Canadian Dollar remains firm so far in August vs. its US peer.  

Statistics Canada is set to release the Canadian Labour Force Survey report on August 9. Market participants so far anticipate that the report will present mixed results, which could further support the Bank of Canada’s (BoC) ongoing easing cycle.

In July, the Bank of Canada trimmed its policy rate by an extra 25 bps to 4.50%, following a quarter-point interest rate reduction at its meeting in June. Back to the last gathering, the central bank left the door open to further rate cuts if inflation continues to progress towards the bank’s target, while it projects consumer prices to hover around the 2.0% goal in the latter part of 2025.

Regarding the domestic labour market, the BoC signalled in June that while it has cooled significantly, wage growth is still elevated when compared to productivity growth.

Statistics Canada reported that the Employment Change shrank by 1.4K jobs in June, halting two consecutive months of increases, while the Unemployment Rate ticked higher for the third consecutive month to 6.4%.

On another key economic indicator, the central bank now sees the Canadian Gross Domestic Product (GDP) expanding by 1.2% in 2024 (from 1.5%), while it expects annualized GDP to expand by 1.7% in Q1, by 1.5% in Q2, and by 2.8% in Q3.

What can we expect from the next Canadian Unemployment Rate print?

Attention remains on the upcoming Canadian labour market report, particularly the wage inflation data, which could influence the bank’s decision on whether to continue reducing its interest rates.

Consensus among market participants projects a slight rise in Canada’s Unemployment Rate to 6.5% in July, up from 6.4% in June. Additionally, investors forecast the economy will add nearly 27K jobs in the same month, reversing June’s 1.4K decrease. It is worth recalling that Average Hourly Wages, a proxy for wage inflation, rose for the second time in a row in June, up by 5.2% vs. June’s 4.8% gain.

BoC’s Minutes from the July meeting, released on August 7, revealed that prior to their decision to cut rates last month, officials expressed concerns that consumer spending in 2025 and 2026 might be considerably weaker than anticipated.

According to analysts at TD Securities: “We look for employment to rise by 30K in July on a rebound in service sector hiring, although this will not be enough to keep the UE rate from climbing 0.1pp to 6.5%. More labour market slack should add to the BoC’s confidence that inflation/wage pressures will continue to ease, but wage growth will remain too high for the BoC’s comfort even with a 0.5pp deceleration to 5.1%”.

When is August’s Canada Unemployment Rate released, and how could it affect USD/CAD?

The Canadian Unemployment Rate for July, accompanied by the Labour Force Survey, will be released on Friday at 12:30 GMT.

Further cooling of the labour market should leave the door wide open for the BoC to trim its interest rate at its next meeting, exerting at the same time some selling pressure on the Canadian currency. This favours some reversal in the strong monthly pullback in USD/CAD so far.

The rally in USD/CAD sparked around mid-July, sending the pair to as high as the 1.3950  region for the first time since October 2022. However, the Canadian Dollar managed to give away part of those losses since then and has started regaining upside momentum, prompting USD/CAD to retreat markedly to the low-1.3700s earlier this week, a region also neighbouring the interim 55-day SMA.

According to Pablo Piovano, senior analyst at FXStreet, further retracements should not be ruled out on the short-term horizon, with spot expected to meet provisional support at the 55-day and 100-day SMAs at 1.3714 and 1.3689, respectively, prior to the more relevant 200-day SMA at 1.3601. The latter reinforces the July low of 1.3584 (July 11) and should act as decent contention for the time being.

In case bulls regain the upper hand, Pablo adds that the immediate target for USD/CAD emerges at the 2024 top of 1.3946 (August 6), prior to the 1.4000 milestone.

Economic Indicator

Unemployment Rate

The Unemployment Rate, released by Statistics Canada, is the number of unemployed workers divided by the total civilian labor force as a percentage. It is a leading indicator for the Canadian Economy. If the rate is up, it indicates a lack of expansion within the Canadian labor market and a weakening of the Canadian economy. Generally, a decrease of the figure is seen as bullish for the Canadian Dollar (CAD), while an increase is seen as bearish.

Read more.

Last release: Fri Jul 05, 2024 12:30

Frequency: Monthly

Actual: 6.4%

Consensus: 6.3%

Previous: 6.2%

Source: Statistics Canada

Employment FAQs

Labor market conditions are a key element in assessing 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 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 because 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 their significance as a gauge of the health of the economy and their direct relationship to inflation.

 

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