Canadian Dollar Boosted by Strong Employment Report

Above: A mechanic and a welder; Edmonton, Alberta, Canada. Image © Adobe Images

The Canadian Dollar outperformed following the release of consensus-beating employment numbers.

Canada created 90.9K jobs in December, the biggest rise in two years, and up from 50.5K in November. This was ahead of consensus estimates for 25K, signalling the economy might have turned a corner.

This lowers the odds of a consecutive Bank of Canada interest rate cut, which is helping Canadian bond yields and the Canadian Dollar rise.

The FX market reaction sees the under pressure Pound to Canadian Dollar exchange rate trade 0.60% lower on the day at 1.7615. The U.S. Dollar to Canadian Dollar conversion is 0.11% higher at 1.4410 and the Euro to Canadian Dollar is a third of a per cent lower at 1.4772.

Sentiment towards CAD was bolstered by news Canada's unemployment rate unexpectedly fell to 6.7% in December from 6.8%, defying the market's expectation that it would rise to 6.9%.

"The huge gain in employment in December supports our view that labour market conditions are strengthening," says Bradley Saunders, North America Economist at Capital Economics. "We are forecasting the unemployment rate to peak at 7.0% before falling back again towards the end of the year."

Andrew Grantham, an economist at CIBC Capital Markets, says employment was much stronger than expected in December, with the increase in employment being reasonably broad-based by industry, led by education, transportation and finance.

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Although the data gives the Bank of Canada the opportunity to take stock of previous rate cuts, most economists think there remains room to cut rates.

Wage growth for permanent employees eased to 3.7% from 3.9%, suggesting that the labour market is nowhere near tight enough to be inflationary.

"Overall, today's report is clearly better than anticipated, although the unemployment rate is still elevated and indicative of slack within the economy, and we still see the need for further interest rate cuts to fully reduce that excess capacity," says Grantham.

"Weakness in private sector hiring still gives reason to think the Bank of Canada will cut rates by 25bp at this month’s meeting," says Saunders at Capital Economics.