Unemployment Rate in Canada expected to tick higher, foreseen at 5.8% in November.
Tepid job creation could help the Bank of Canada to hold the policy rate steady.
USD/CAD could plunge with softer-than-expected employment figures.
Canada will release the Labor Force Survey on Friday. The Statistics Canada report is expected to show that the Unemployment Rate increased to 5.8% in November from 5.7% in the previous month. At the same time, the Net Change in Employment, which is the number of new jobs created throughout the month, is foreseen at 15,000, after the country added just 17,500 new job positions in October.
The Bank of Canada (BoC) decided to leave the benchmark interest rate unchanged at 5% in its October meeting, with policymakers claiming they want to allow monetary policy to cool the economy and relieve price pressure, despite noting inflationary risk increased since their July meeting. Employment-related data is critical for the BoC, as a too-tight labor market may push inflation up. The Canadian Dollar (CAD) usually strengthens with a better-than-anticipated report, yet an upbeat outcome could also mean more rate hikes in the near future.
How can the unemployment report affect the Bank of Canada policy?
The BoC engaged in massive rate hikes as inflation soared to multi-decade highs in mid-2022 as a result of the post-pandemic reopening. Central banks from around the world lived a similar experience, with all of them juggling to tame inflation without triggering a steep economic setback.
Price pressures indeed eased from their peaks but at a slower-than-anticipated pace. One of the main factors maintaining inflation high comes from the employment sector, as a solid pace of job creation leads to increased spending. Higher demand tends to push prices up.
In a high-inflationary context, central banks tend to welcome higher Unemployment Rate levels, even at the risk of an economic slowdown.
Through the past year and a half, policymakers prioritized taming inflation over avoiding a recession. But that changed a few months ago, with central banks adopting a more cautious stance, arguing that monetary policy tightening needs time to unfold. The non-spoken reason is that further tightening will sink economic growth.
The Bank of Canada is not oblivious to this scenario. High rates are affecting households and businesses, and despite inflation remaining above the central bank’s target of around 2%, policymakers can not add more pressure.
Speculative interest started betting on the end of monetary tightening in mid-2023 as central banks started spacing rate hikes, reducing the number of basis points of each rate increase and finally pausing. Worldwide, policymakers made it clear that additional hikes remain on the table, particularly if inflation resumes its upward route, but markets do not believe so.
“This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability,” BoC Governor Tiff Macklem said in a statement last week. However, he also warned that it is too early to think about potential rate cuts. Still, financial markets are now betting on potential dates for rate cuts, against policymakers’ warnings.
With that in mind, a higher-than-anticipated Unemployment Rate and a tepid Net Change in Employment will be seen as a confirmation of no more rate hikes, and push the CAD higher.
When is November’s Canada Unemployment Rate released and how could it affect USD/CAD?
The Canadian Unemployment Rate for November will be released with the publication of the Labor Force Survey on Friday at 13:30 GMT. Ahead of the release, market forecasts point to a soft report. The Unemployment Rate is expected to have increased to 5.8% from 5.7% in October, while the Net Change in Employment is expected at 15,000.
As said, tepid figures usually weigh on the CAD, which means USD/CAD should move north. But with the focus on central banks’ future decisions, softer-than-anticipated figures will likely lift hopes about the end of monetary tightening, and end up boosting the CAD against its American rival.
The US Dollar has been under steady selling pressure since the United States (US) Federal Reserve (Fed) decided to keep interest rates unchanged for two meetings in a row. USD/CAD peaked at 1.3898 on November 1, and trades at around the 1.3560 level ahead of the employment-report release.
Valeria Bednarik, chief analyst at FXStreet, said: “Bets against the US Dollar seem a bit overdue, and USD/CAD recovered from a multi-week low of 1.3540 posted on Wednesday, resuming its decline on the back of softer-than-anticipated US inflation figures. Looking at the Canadian monthly employment survey, it is worth noting that the market is trading on sentiment, rather than on economic health. A solid report could initially trigger CAD’s strength, but market participants could quickly change their minds, and bet against the CAD on hopes the BoC will refrain from hiking further.”
When it comes to technical levels, Bednarik adds: “Measuring the latest decline between 1.3765 and 1.3540, the 38.2% Fibonacci retracement comes at 1.3626, the immediate resistance level. Steady gains above it expose the next relevant Fibonacci resistance, the 61.8% retracement at 1.3680. Gains beyond the latter seem unlikely amid broad US Dollar weakness. Should the pair turn south, support could be found in the low at 1.3540, while below the latter, 1.3470 comes into sight.”
Canadian Dollar FAQs
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
Economic Indicator
Canada 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.
Next release: 12/01/2023 13:30:00 GMT
Frequency: Monthly
Source: Statistics Canada
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