Canadian Dollar Slides As Unemployment Jumps

Image © Bank of Canada

The Canadian Dollar fell against all its G10 peers - apart from the U.S. Dollar - after official data revealed Canada's job market continued to loosen in October and lower the odds of another Bank of Canada rate rise.

Canada's Labour Force Survey revealed 17.5K jobs were created in October, which was below the 22.5K the market expected and down significantly on September's 63.8K reading.

Odds of another Bank of Canada interest rate hike receded further after Statistics Canada revealed the unemployment rate rose to 5.7% from 5.5%, which was above the 5.6% the market was expecting.

"The tick up in the unemployment rate brought the cumulative increase over the last 6 months to 0.7% (from 5.0% in April). The rate itself is still low, but an increase of that magnitude over that period is relatively rare historically," says Nathan Janzen, Assistant Chief Economist at Royal Bank of Canada.

Canadian Dollar weakness was broad-based, with losses coming against all G10 peers, apart from the U.S. Dollar, which also endured a surprisingly weak labour market print.

The U.S. Dollar to Canadian Dollar rate fell 0.27% to 1.3703, the Pound to Canadian Dollar exchange rate rose 0.80% to 1.6897 and the Euro to Canadian Dollar was half a per cent higher at 1.4665.

RBC's Janzen explains that Canadian employment growth is no longer keeping up with an increasing population and workforce growth.

This will inevitably place downside pressure on wages which will act to cool inflation further, a development that will be welcomed by the Bank of Canada, which has been fighting above-target inflation for months now.

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The details of the report were particularly weak, with the increase in September employment being exclusively in part-time positions (+21k) as full-time jobs edged lower.

"It was a soft print nearly across the board. Employment growth slowed considerably, with part-time hiring offsetting a small decline in full-time work, and year-over-year gains in hours worked eased as well," says Marc Desormeaux, Principal Economist at Desjardins Bank.

"The still-tight labour market is showing signs of easing, and Canadian consumers and businesses still haven’t felt the full effects of prior borrowing cost increases," he adds.

Above: Wage gains slow following reacceleration in recent months. Image courtesy of Desjardins Bank.

Desjardins expects Canada to enter a mild recession in the coming quarters. "We remain of the view that the Bank of Canada’s next move will be a cut in the second quarter of 2024," says Desormeaux.

Rising expectations for a Bank of Canada rate cut are weighing on Canadian bond yields relative to elsewhere, which is in turn dragging the Canadian Dollar lower.

This labour market report adds to evidence the outlook for the Canadian Dollar has deteriorated of late and further losses against the likes of the Pound and Euro can be expected.