Canadian Dollar’s Jobs Rally Could Push GBP/CAD to 1.68, says TD Securities

• CAD sweeps higher as jobs renaissance continues
• Job gains leave economy close to full employment
• Could prompt speculation about BoC rate outlook
• TD Securities tips GBP/CAD for slide back to 1.68

Image © Bank of Canada

The Canadian Dollar swept higher on Friday after official data suggested that Canada’s labour market renaissance continued in December with job gains that pushed the unemployment rate back to pre-pandemic levels, prompting strategists at TD Securities to advocate bets against GBP/CAD.

Canada’s labour market created or recovered from the coronavirus some 54.7k jobs in the final month of 2021, building further on the blockbuster 153.7k increase seen in November and pulling the unemployment rate down from 6% to 5.9% in the process.

Consensus estimates had suggested that economists were on average looking for only a 24.5k gain in employment for last month, which was expected to leave the unemployment rate unchanged, although the upside surprise has driven the jobless figure back to its lowest since February 2020.

“Despite stronger population growth recently and an unchanged participation rate, the solid advance in jobs was enough to take the unemployment rate marginally lower to 5.9% (only a couple of ticks away from the 5.7% level it was at in February 2020),” says Andrew Grantham, an economist at CIBC Capital Markets.

“While not all of the detail was positive, with wage growth decelerating unexpectedly and hours worked falling on the month, today's report still suggests that the economy was very close to full employment in December,” Grantham also said in review of the data.

Above: GBP/CAD rate shown at 15-minute intervals alongside USD/CAD.

The Pound to Canadian Dollar rate slumped in the minutes immediately after the figures were released, trading briefly below the 1.72 handle before paring losses, as the all-important USD/CAD rate slipped back toward the 1.27 handle.

“We enter a GBPCAD short targeting 1.69. Following the Canadian jobs report, we think markets will move to price in a non-trivial risk of a hike by the BOC this month,” says Mazen Issa, a senior FX strategist at TD Securities

“While we officially forecast this to begin in April, we acknowledge that the BOC - like other central banks - may opt for an 'earlier mover advantage' given inflation pressures. We think this can compel a repricing in the Canadian front-end (or at the very least introduce a bias) relative to the sterling front-end, which looks reasonably priced for BOE tightening already,” Issa told clients in a note following the jobs data.

Canada’s labour market has continued to recover from coronavirus-induced losses in recent months while North America’s second largest economy also appeared to perform much more strongly in the final quarter than the Bank of Canada (BoC) and private sector forecasters had anticipated.

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“The further tightening of restrictions at the start of January likely sets us up for a notable decline in the jobs tally to start 2022, albeit maybe not as large as in prior virus waves given that companies may be reluctant to let staff go due to the difficulties they faced recruiting in the reopening phase,” warns CIBC’s Grantham.

While the economic outlook could yet turn for the worse there’s potentially a non-trivial chance of the BoC lifting its interest rate at some point in the opening quarter of the year, which would be a surprise for many given Friday’s market expectations for the bank’s cash rate this year.

Pricing in overnight indexed swap markets was assigning a zero percent probability to the prospect of a January interest rate rise and only around an 80% probability of a move in March before Friday’s data after the BoC indicated strongly in December that its cash rate is unlikely to rise from its current 0.25% before the second quarter, while also leaving itself room to wait until the third quarter of the year.

“While we also like USDCAD shorts, the USD leg could be sticky given a very hawkish Fed, broad price action, and well-entrenched positioning. GBPCAD short also screens well on our analytics dashboard, with GBP the richest currency in the G10 on a positioning and valuation basis while the CAD offers modest cheapness,” says TD Securities’ Issa, who sees scope for GBP/CAD to fall as far as 1.68 over the next one-to-two months.

Above: USD/CAD shown at daily intervals alongside GBP/CAD.