One of the interesting currencies to follow amid the war with Iran has been the Canadian dollar. It had been on a weakening track in late February, but has since reversed course and is even gaining despite the stronger greenback. The main reason is that Canada is a major crude producer, and the increased oil revenue would help shore up the currency.
But as fluctuations in crude average out, will the currency resume its downward trend? Canada’s economy has underperformed amid a trade war with its largest partner, the US. Some analysts hoped that the rapprochement between Ottawa and Washington amid the Middle East crisis might ease the trade negotiations. That could have also helped the CAD. Friday sees the release of key employment figures that could dictate the monetary policy outlook.
The Troubling Jobs Numbers
Last year, the BOC continued its easing cycle while the Fed was mostly steady until the final quarter. By then, the BOC (Bank of Canada) estimated it had lowered its policy rate enough to address the slowing economy and weak labour market. Many analysts estimated that the BOC had finished easing for the time being.
Meanwhile, the Fed was expected to continue easing amid pressure from the White House and a leadership transition, as Jerome Powell’s term ends in May. This would have helped lower the CAD as the greenback weakened against its northern counterpart. But this was disrupted last month when the labour force participation surprised everyone by dropping 0.4ppts, the largest decline since the pandemic.
More Cuts Ahead?
If February employment numbers suggest further weakness, then the CAD could come under renewed pressure as investors reconsider whether the BOC will cut rates again. The drop in the participation rate meant that the unemployment rate dropped to 6.5% in January, despite a loss of 119 jobs. This was in contrast to the US at the time, which saw a similar number of jobs added.
Now that we’ve had a dismal US NFP, investors are less optimistic about Canada’s upcoming jobs data. The drop in the labour force participation rate could indicate structural issues in the job market, as people are discouraged from seeking work. So, even though the unemployment rate might not be so bad on the surface, it might propt the BOC (Bank of Canada) to worry about demand destruction and deflationary pressures. This would raise the odds of a rate cut.
What to Look Out For
The consensus among analysts is that Canadian job adds in February will turn green again at +10K. Meanwhile, the unemployment rate is forecast to jump to 6.7%, as the labour force participation rate normalises. This could be a worrying sign for the BOC and undermine some of the currency’s gains.
If, however, the jobs data is stronger than anticipated, the market could refocus on oil and give the CAD a boost. the BOC (Bank of Canada) will hold its policy meeting next week, and is widely expected to leave rates unchanged, unless there is a major surprise with the labour data.
