Canadian Dollar: Jobs Miss Points to Recession, BoC Slowdown

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Canada reported job losses of 39.7K in August, reinforcing economist expectations for recession and a slowdown in the pace the Bank of Canada hikes interest rates.

The data was released on a day the Canadian Dollar was registering losses against most its major peers.

The market was expecting the economy to add 15K jobs, but instead what was delivered was a third successive month of losses after July's -30.6K and June's -40K.

"Broader economic growth headwinds are also building with inflation still running exceptionally hot and central banks continuing to push interest rates higher in response. We expect those headwinds to ultimately be enough to push the economy into a modest contraction in the year ahead," says Nathan Janzen, Assistant Chief Economist at RBC Economics.

The Canadian Dollar was a laggard ahead of the weekend, falling a quarter of a percent against the Pound, 0.10% against the Euro but losses against all other G10 currencies were more significant.

But against the Greenback some gains were registered, with the U.S. Dollar-Canadian Dollar exchange rate down a quarter of a percent on the day at 1.3047.

Canada's unemployment rate unexpectedly jumped to 5.4% from 4.9%, where analysts were looking for a more moderate reading of 5.0%.

Wage pressures remain elevated, rising from 5.2% year-on-year in July to 5.4% in August.

The Bank of Canada will therefore still have incentive to raise interest rates further over coming weeks, although expectations for an economic slowdown will ease the size and pace of further hikes.

This would be in line with the overall tone set by the Bank of Canada at this week's policy event, where rates were lifted 75 basis points.

"With the decline in employment partly a result of a large drop in education, which often sees volatility in summer months, we doubt that today's weak headline numbers will change the Bank of Canada's commitment towards raising interest rates further," says economist Andrew Grantham at CIBC Capital Markets.

"The weak headline figures may have the Bank of Canada questioning its apparent commitment to even higher interest rates. However, with the large drop in education employment potentially reversing ahead, and with one more labour force survey before the Bank's October meeting, it still seems likely that at least one more rate hike will be in store before a pause is seen," he adds.

For the Canadian Dollar outlook numerous factors remain in play, including oil prices, the strength of the U.S. economy, broader risk sentiment and Bank of Canada policy.

A slowing economy could weigh on the Canadian Dollar as it could prompt the market to lower its expectations for the number of hikes to come from the Bank of Canada.

"The weakness of today’s data likely means the Bank will be debating between the merits of a 25bp or 50bp rate hike in October rather than the more aggressive moves made in recent meetings," says Marc Desormeaux, Principal Economist at Desjardins Bank.

Falling oil prices are also acting as a headwind, as is the ongoing decline in global equity markets.

The Canadian Dollar may still be 2022's second-best performer, but that outperformance no longer looks assured over coming weeks.