Friday’s release of key jobs numbers is the last major data point that the BOC(Bank of Canada) will have before its rate decision next week. It could be pivotal in shaping market expectations for monetary policy, potentially changing the course of USDCAD. A significant deviation from expectations could move the currency pair substantially, as it could indicate a deviation from the economic data driving the greenback.
Generally, CAD has been weaker as the Canadian economy underperforms, with USDCAD rising as the dollar gains amid growing bets that the Fed will hike rates. However, given the interconnection between the two economies, the BOC might be drawn to raise rates if the jobs situation improves. Canada is also facing higher inflation pressures from rising energy prices, but the BOC is seen as less likely to hike than other central banks, given the high unemployment level.
What Markets Are Looking For
The consensus is that Canada’s labour market will remain weak, which justifies the BOC(Bank of Canada) holding despite higher consumer prices in the short term. Long-term slack in the labour market would reverse the likely transitory increase in energy costs. Therefore, an improvement in the jobs market would likely be a bigger surprise to the market than a worse-than-expected one.
The consensus is for a rebound in the employment change number, turning positive in May to +10K from April’s weak -17.7K. The unemployment rate is also expected to tick down slightly to 6.8% from 6.9% in April. The last month’s reading was the highest in six months, indicating persistent slack in the labour market that can depress consumer demand.
How the Market Could React to Canadian Jobs Data
The CAD is likely to be sensitive to this data release if there is a substantial beat or miss over expectations. However, given the simultaneous release of two major data points, there could be some additional volatility if the data is mixed. The unemployment rate is likely to take precedence over the job creation number, as it is considered more relevant to the BOC’s decision.
A stronger result, with job creation exceeding 25K and a larger drop in the unemployment rate, would signal market stabilisation and an economic recovery. It might not move the needle for the upcoming BOC meeting, but it would allow the central bank to turn more hawkish down the line if inflation remained higher. This could support the CAD at least in the short term.
How Long Will the BOC Hold?
If the data is weaker than anticipated, for example, with a negative jobs print and the unemployment staying at multi-month highs, then this could weaken the Loonie. The USDCAD could accelerate higher, as it suggests the BOC will stay on hold amid inflation uncertainty and will likely cut again.
The market is pricing in the BOC(Bank of Canada) keeping rates unchanged for the rest of the year, with a modest upward bias after six months. That is based on an assumption that the economy will firm up in the second half. However, weak job numbers could mean that the BOC will be inclined to ease in a few months, and that could weigh further on the CAD.
