Canadian Dollar Retreats as "Softer Details" Emerge from Behind Show-stopping September Jobs Number

Image © Bank of Canada

The Canadian Dollar ceded ground to rivals Friday as markets overlooked a stronger-than-expected jobs number to focus on details in the latest official data that suggest the labour market may have lost some momentum in September.

Canada's economy created what at first glance appears to be a show-stopping number of jobs during the recent month, with employment rising by 63,300 when markets had looked for only a 25,000 increase. 

The number is a definitive improvement on the -50,700 contraction seen back in August and was enough to push the unemployment rate down from 6% to 5.9% in September. 

However, the headline numbers initially distracted from less appetising details contained further down in the Statistics Canada report, according to analysts at Toronto-headquartered CIBC Capital Markets.

"The Labour Force Survey estimate of employment continued its wild ride, posting a massive gain of 63.3K jobs in September," says Royce Mendes, an economist at CIBC. "While that was all driven by paid employment, it did apparently come in the part-time sector, taking some of the shine off of the headline reading."

In addition to the fact that job creation was concentrated largely in the unloved part-time segment of the market, wage growth also disappointed in September. Canadian pay growth fell from 2.6% to 2.2% during the recent month.

"Wages in this survey had looked artificially elevated, coming off some weak numbers last year, and the current reading looks more in line with the trend in other wage indicators," Mendes adds. "Overall, the headline surprises will support the Canadian dollar and yields today, but they likely overstate the positives for the economy given the underlying details."

Markets care about the labour market data because falling unemployment and improving job creation, according to conventional thinking on the subject, put upward pressure on wages.

Pay growth leads to increased demand within an economy and exerts upward pressure on inflation, with implications for interest rates and financial markets.

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

The USD/CAD rate was quoted 0.02% higher at 1.2922 following the report, after whip-sawing in response to U.S. labour data in addition to Canada's.

The Pound-to-Canadian-Dollar rate was 0.47% higher at 1.6903 during noon trading while the EUR/CAD rate was 0.10% higher at 1.4896. 

Friday's labour market report comes a week after negotiators agreed a deal to save the North American Free Trade Agreement (NAFTA) and ahead of the October 24 Bank of Canada (BoC) interest rate decision. 

Sunday's deal to save the North American Free Trade Agreement (NAFTA) has removed a Domocles Sword, or the White House threat of a U.S. withdrawal, from above the economy's head and given a green light for the Bank of Canada to go on with its push to gradually raise its interest rate.

There was previously considerable uncertainty about the path of BoC monetary policy given the trade talks were deadlocked right up to the last minute but now markets have a clearer view of the road ahead for the Canadian economy.

Pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in interest rates while providing insight into monetary policy, has shifted in favour of more interest rate rises from the BoC over coming months since the new NAFTA deal was unveiled.

The market implied interest rate for the BoC's October 24 meeting is around 1.71%, up from just 1.64% at the beginning of September, while the rate implied for January 09 has moved from 1.84% to 1.97% during the same time. The current cash rate is just 1.5%.

Analysts at Toronto-headquartered BMO Capital Markets said this week the Canadian Dollar can continue to rise over coming months due to a number of factors. Scotiabank, another Toronto-headquartered lender, had a similar view to offer.

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