Canadian Dollar Weighs on GBP/CAD after Job Market Helps BoC 

Image © Bank of Canada, Reproduced Under CC Licensing

The Pound to Canadian Dollar rate fell from landmark highs in the final session of the week after Statistics Canada reported a rebound in employment and moderation of pay growth that could help to assuage Bank of Canada (BoC) concerns about inflation.

Canadian employment rose around 60k in June to more than reverse an earlier -17.3k fall while also far exceeding a consensus that had looked to see only a 20k increase, although some other details of the report were less appetising for workers even as they were welcomed by the Loonie and quite likely also the BoC. 

Part-time employment fell an estimated -49.8k last month while increases in participation and the number of unemployed lifted the unemployment rate from 5.2% to 5.4%.

"Overall, despite the strong headline gain in employment there are further signs of a loosening in labour market conditions within today's job figures," says Andrew Grantham, an economist at CIBC Capital Markets.

"Albeit maybe not enough to prevent the Bank of Canada pulling the trigger on another interest rate hike as early as next week," he adds.

Above: GBP/CAD shown at 15-minute intervals alongside USD/CAD. Click image for closer inspection. 

Perhaps most notably for the BoC, growth in average hourly pay fell from 5.1% to 3.9% for the year to the end of June, which was its slowest since May 2022. 

Reducing the level of pay growth has been a key milestone objective for the BoC in its effort to bring inflation back to the 2% target so Friday's data was a further win for the bank after all bar one of the main measures of inflation fell further than was expected in the May report out last month. 

That showed the core rate of inflation in Canada falling from 4.1% to 3.7% while the overall inflation rate fell from 4.4% to 3.4%, leaving each within arm's reach of the 2% target ahead of the July interest rate decision next Wednesday. 

Prices in derivative markets suggest some investors and traders see a more-likely-than-not probability of the cash rate rising from 4.75% to 5% next Wednesday but economists are divided in their forecasts; suggesting the decision is something of a wild card.

"There are still signs that the economic backdrop is softening. Consumer delinquency rates are edging higher, job openings are edging lower, and wage growth is slowing," says Nathan Janzen, assistant chief economist at RBC Capital Markets.

Above: GBP/CAD shown at daily intervals alongside USD/CAD. Click image for closer inspection. 

"But the BoC highly likely planned more than one interest rate hike when they ended a short pause in increases last month. Economic growth data and 'sticky' core inflation readings since then haven't been soft enough to derail those plans," Janzen adds. 

RBC retains a forecast for an increase in the cash rate next week but other local firms including CIBC and National Bank of Canada are less certain the BoC would want to raise rates again so soon after interrupting an earlier "conditional pause" in the rate cycle only just last month.

Meanwhile, the summary of last month's deliberations on the governing council suggested further increases would depend on if local economic data calls for them while this Friday's figures, at least, appeared to stop short of doing that. 

"With inflation trending down faster on this side of the border, it is very unlikely that the BoC will want to outpace the Fed on potential summer hikes," says Stéfane Marion, chief economist and strategist at NB Financial Markets.

"One of the main drivers of CAD appreciation in the first half of the year was the significant tightening of Canada-US interest rate differentials," he adds. 

Above: GBP/CAD shown at weekly intervals with Fibonacci retracements of 2021 rally indicating possible areas of technical resistance while selected moving averages denote prospective support.