Canadian Dollar Rises Following Upbeat Labour Report and Trade Tariff Reprieve

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"This wasn't a very exciting report, but seems more indicative of the underlying trend in the labour market than what had been seen in recent months." - CIBC Capital Markets.

The Canadian Dollar traded higher across the board Friday as traders responded to an upbeat set of February labour market statistics and Canada having won a last minute reprieve from new White House steel and aluminium tariffs.

Canada’s economy created 15,000 new jobs during the February month, according to a report from Statistics Canada, which was modestly below the consensus for 21,300 but marks a partial recovery from the 88,000 job losses seen in January.

"The Labour Force Survey finally showed a more trend-like employment change after a number of volatile months. The net increase of 15k is in line with what had been the average over the bumpy prior three months," says Royce Mendes, an economist at CIBC Capital Markets.

"The gains were, however, completely due to a rebound in part-time jobs, while the fall in full-time almost wiped out January's advance."

Separately, the unemployment rate also posted a surprise fall for February, dropping to 5.8% when markets had expected it to hold steady at 5.9%. This takes the unemployment rate back to the record-low level last seen in December.

Markets have been looking to the labour market data for their next cues on the Loonie, which has been rocked this week by a dovish sounding Bank of Canada and Washington’s new tariffs against steel and aluminium imports, which had threatened Canada’ exports to its largest market for metals.

"This wasn't a very exciting report, but seems more indicative of the underlying trend in the labour market than what had been seen in recent months. Not much market reaction expected," Mendes adds.

The Canadian Dollar was quoted a fraction higher against all of its major rivals following the release Friday, after having reversed what was a chequered performance earlier on.

Above: USD/CAD shown at hourly intervals.

USD/CAD was 0.25% lower at 1.2886 while the Pound-to-Canadian-Dollar rate was 0.12% lower at 1.7779.

Above: Pound-to-Canadian-Dollar rate shown at hourly intervals.

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Trade Tension Ramps Up, but Canada Gets Reprieve

Friday’s data come closely on the heels of a White House decision to impose new tariffs on imports of aluminium and steel from into America.

President Donald Trump announced late Thursday that America will levy tariffs of 10% and 25% respectively on imports of both metals, with the exception of those that come from Canada and Mexico, under section 232 of the Trade Expansion Act of 1962.

Countries will have the opportunity to apply for exemption and so too will American users of steel and aluminium products in the states, where they are unable to find a suitable alternative product that is made in America. The tariffs go into effect in 15 days time.

Washington says the tariff move is intended to protect American steel producers, and jobs, from dumping by state-subsidised foreign producers although it is thought they will be applied to imports across the board, from all countries.

Tariffs come at the tailend of a week long period where Washington’s rhetoric on international trade has hardened, particularly around metals and the North American Free Trade Agreement.

We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed. Also, Canada must..

— Donald J. Trump (@realDonaldTrump) March 5, 2018

A so-far fruitless effort to renegotiate the North American Free Trade Agreement have been at the top of policymakers’ list of worries for some time, although the White House clamp down on so called unfair trading practices ratchets up the pressure on Canada’s policymakers to secure a new deal with the country’s next door neighbour.

“The recent sharper tone from the US and the uncertain outcome of the negotiations should initially deter the BoC from raising the key interest rate further, while the Fed will remain on course. The CAD is therefore likely to lose out on the dollar in the short term,” says Antje Praefcke, an analyst at Commerzbank.

Bank of Canada turn Dovish

Friday’s data also come closely on the heels the March interest rate decision and monetary policy statement from the Bank of Canada, which saw the bank adopt what was perceived to be a more dovish tone than it had in January.

The BoC says global growth remains on a firm footing and that tax cuts, as well as higher government spending, south of the border are expected to lift economic activity both at the global level as well as in Canada over the coming months.

“However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks,” it added.

Rate setters noted the Canadian economy grew by a healthy 3% in 2017, which was in line with the bank’s earlier projections, although they also flagged that recent economic data have been disappointing.

Canadian economic momentum slowed toward the end of 2017, with the pace of GDP growth ticking down a touch in December while consumer spending retreated further from its earlier peaks.

“In the fourth quarter, GDP growth was slower than expected, largely due to higher imports, while exports made only a partial recovery from their third-quarter decline. The gain in imports mainly reflected stronger business investment, which adds to the economy’s capacity,” the BoC said in its statement.

Moreover, the labour market gave back some of its recent strong gains once into January, with the unemployment rate notching higher to 5.9% while jobless claims picked up by 88,000.

That said, inflation has continued to trend higher at the start of the year, coming in at 1.7% in January, which takes the consumer price index closer to the midpoint of the BoC’s 1% to 3% target range.

“Inflation is running close to the 2 per cent target and the Bank’s core measures of inflation have edged up, consistent with an economy operating near capacity. Wage growth has firmed, but remains lower than would be typical in an economy with no labour market slack,” the BoC said in its statement.

Market implied probabilities of further BoC rates hikes this year have been headed in the wrong direction of late, as market confidence in the bank’s ability to push the cash rate higher has waned.

Interest rate derivatives market pricing on January 17, the day when the BoC last raised rates, implied an October 2018 cash rate of 1.783%. However, this implied rate had fallen to just 1.671% by 08:00 on March 07.

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