Canadian Dollar Hands Back Gains after Jobs Report Disappoints Market, NAFTA Talks Roll On

-CAD hands back gains after August labour report disappoints market.

-Economy sheds jobs in August, pushing the unemployment rate higher. 

-NAFTA negotiations, securing a deal, matter most for CAD outlook now. 

© Pavel Ignatov, Adobe Stock

The Canadian Dollar handed back earlier gains Friday after official data showed the nation's labour market wobbling in August, countering optimism that prevailed after a Bank of Canada (BoC) deputy governor said policymakers recently contemplated stepping up the pace of their interest rate rises.  

Canada's economy shed 51,600 jobs during August, almost completely reversing the 54,100 gain recorded back in July, while the unemployment rate posted a surprisingly large increase from 5.8% to 6% when markets had looked for it to nudge higher to only 5.9%. 

However, these headline numbers mask a favourable shift in the composition of the Canadian labour market, with the number of part-time workers having declined considerably during the recent month and in the last year, while full-time employment has grown steadily. 

"The wacky world of Canadian jobs data stayed that way in August, but there was at least one positive amidst a generally downbeat report that came on the heels of an upbeat July. That positive was in a solid 40K rise in full time work," says Avery Shenfeld, chief economist at Toronto-headquartered CIBC Capital Markets. 

Canada's economy shed 92,000 part-time jobs in August while full-time employment grew by an unspecified number, according to Statistics Canada. When compared with the same period one year ago, part-time jobs are down 154,000 while there are now 326,000 more full-time employees in the labour market. This is a positive change. 

However, and further on the downside, the decline in total employment for August was accompanied by a weaker level of wage growth for the economy overall. Canadian pay packets grew at an annualised pace of 2.6% in August, down from 3% back in July.

"That's plenty of reason for the Bank of Canada to stick with its gradualist approach to rate hikes. Despite the headlines, we will stick with our call for one more hike this year (in Oct), assuming a NAFTA deal is reached. The C$ will be softer on this news, and short term bond yields a bit lower," Shenfeld adds.  

Markets care about the labour market data because falling unemployment and improving job creation, according to conventional thinking on the subject, put upward pressure on wages. Wage growth itself leads to increased demand within an economy and exerts upward pressure on inflation, which has implications for interest rates and financial markets.

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

The USD/CAD rate was quoted 0.14% higher at 1.3171 following the release after reversing an earlier 0.24% loss, while the Pound-to-Canadian-Dollar rate was 0.36% higher at 1.7064. The Loonie was still higher against all other G10 currencies barring the Swedish Krona Friday, in the wake of the report.

"A knee-jerk bounce in CAD is likely to get quickly faded, leaving strong support ahead of 1.31 into the weekend. We also prefer to remain short CAD on the European crosses like EUR and NOK and like the optics of tactically buying into the lows marked in AUDCAD. Our AUDCAD HFFV gauge implies a move back to 0.96," says Mark McCormick, North American head of FX strategy at Toronto-headquartered TD Securities, in a note ahead of the release.  

Friday's price action comes hard on the heels of a speech by BoC deputy governor Carolyn Wilkins late Thursday, in which she said the bank recently contemplated stepping up the pace at which it is tightening Canadian monetary policy. Wilkins says the BoC also thought about dropping guidance from its statements suggesting future hikes would be "gradual" in nature, but ultimately decided against both moves. 

"It is a natural question to ask, given that the economy has been operating at potential for the past year and it is in this part of the cycle when interest rates typically rise to pre-empt a buildup in inflation pressures," Wilkins told her audience at the Saskatchewan Trade and Export Partnership.

Coming just days after the BoC decided to eschew an interest rate rise in September, Canada's Dollar rose sharply in response to the comments, although some strategists are saying the speech has been taken out of context and that the market reaction has been excessive.

"We are a bit taken aback by headlines to the effect that the Bank considered dropping its gradualist approach to hikes, to which the knee jerk reaction in the market will be to assume that we are close to an acceleration in rate hikes ahead. We don't see it that way when looking at the full text," says Avery Shenfeld, chief economist at Toronto-headquartered CIBC Capital Markets.

Canada's central bank left its overnight rate unchanged at 1.5% in September, leaving analysts looking firmly to the October meeting for what will be its third interest rate rise in 2018. Canadian inflation hit 3% back in July, which is substantially ahead of the BoC's 2% target, while economic growth has also surged too.

This will add further to inflation pressures during the months ahead, but Bank of Canada interest rate policy remains largely at the mercy of President Donald Trump and progress in the North American Free Trade Agreement (NAFTA) negotiations. 

"There is now a formal deadline to wrap up negotiations with Canada by the end of this month.The timetable suggests that this month could prove pivotal for Canada dollar performance heading into year end. The Canada dollar has weakened in recent days to reflect more concern that a deal may not be agreed, which has prevented it from fully benefiting from both the higher price of oil and hawkish BoC policy expectations," says Lee Hardman, a currency analyst at MUFG. 

Officials from all signatory countries have been attempting to renegotiate NAFTA at the behest of President Donald Trump for more than a year now, but US and Mexican officials reached a deal in principle last week after freezing Canadian negotiators out of the talks.

This saw President Trump present Canada with a choice between signing up to the same terms agreed with Mexico or thrashing out a separate agreement before a Friday 31, August deadline.

The deadline lapsed without a deal, leading Trump to declare there "is no political necessity to keep Canada in the new NAFTA deal". Trump also stated that "Canada will be out" if talks to resolve differences over several key issues are unsuccessful.

Chief among those key issues is the system of subsidies for the dairy sector and tariffs on dairy goods imported from the US. President Trump wants the tariffs lifted and subsidies ended, but Prime Minister Justin Trudeau told reporters Friday that "we are not going to do that".

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