Higher Canada Unemployment Rate expected to ease BoC concerns over inflation

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• Unemployment Rate in Canada expected to tick higher, foreseen at 5.8% in November.
• Tepid job creation could help the Bank of Canada to hold the policy rate steady.
•  USD/CAD could plunge with softer-than-expected employment figures. 

Canada will release the Labor Force Survey on Friday. The Statistics Canada report is expected to show that the Unemployment Rate increased to 5.8% in November from 5.7% in the previous month. At the same time, the Net Change in Employment, which is the number of new jobs created throughout the month, is foreseen at 15,000, after the country added just 17,500 new job positions in October.

The Bank of Canada (BoC)  decided to leave the benchmark interest rate unchanged at 5% in its October meeting, with policymakers claiming they want to allow monetary policy to cool the economy and relieve price pressure, despite noting inflationary risk increased since their July meeting. Employment-related data is critical for the BoC, as a too-tight labor market may push inflation up. The Canadian Dollar (CAD) usually strengthens with a better-than-anticipated report, yet an upbeat outcome could also mean more rate hikes in the near future. 

How can the unemployment report affect the Bank of Canada policy?

The BoC engaged in massive rate hikes as inflation soared to multi-decade highs in mid-2022 as a result of the post-pandemic reopening. Central banks from around the world lived a similar experience, with all of them juggling to tame inflation without triggering a steep economic setback.

Price pressures indeed eased from their peaks but at a slower-than-anticipated pace. One of the main factors maintaining inflation high comes from the employment sector, as a solid pace of job creation leads to increased spending. Higher demand tends to push prices up.

In a high-inflationary context, central banks tend to welcome higher Unemployment Rate levels, even at the risk of an economic slowdown.

Through the past year and a half, policymakers prioritized taming inflation over avoiding a recession. But that changed a few months ago, with central banks adopting a more cautious stance, arguing that monetary policy tightening needs time to unfold. The non-spoken reason is that further tightening will sink economic growth. 

The Bank of Canada is not oblivious to this scenario. High rates are affecting households and businesses, and despite inflation remaining above the central bank’s target of around 2%, policymakers can not add more pressure. 

Speculative interest started betting on the end of monetary tightening in mid-2023 as central banks started spacing rate hikes, reducing the number of basis points of each rate increase and finally pausing. Worldwide, policymakers made it clear that additional hikes remain on the table, particularly if inflation resumes its upward route, but markets do not believe so.

“This tightening of monetary policy is working, and interest rates may now be restrictive enough to get us back to price stability,” BoC Governor Tiff Macklem said in a statement last week. However, he also warned that it is too early to think about potential rate cuts. Still, financial markets are now betting on potential dates for rate cuts, against policymakers’ warnings. 

With that in mind, a higher-than-anticipated Unemployment Rate and a tepid Net Change in Employment will be seen as a confirmation of no more rate hikes, and push the CAD higher. 

When is November’s Canada Unemployment Rate released and how could it affect USD/CAD?

The Canadian Unemployment Rate for November will be released with the publication of the Labor Force Survey on Friday at 13:30 GMT. Ahead of the release, market forecasts point to a soft report. The Unemployment Rate is expected to have increased to 5.8% from 5.7% in October, while the Net Change in Employment is expected at 15,000. 

As said, tepid figures usually weigh on the CAD, which means USD/CAD should move north. But with the focus on central banks’ future decisions, softer-than-anticipated figures will likely lift hopes about the end of monetary tightening, and end up boosting the CAD against its American rival. 

The US Dollar has been under steady selling pressure since the United States (US) Federal Reserve (Fed) decided to keep interest rates unchanged for two meetings in a row. USD/CAD peaked at 1.3898 on November 1, and trades at around the 1.3560 level ahead of the employment-report release. 

Valeria Bednarik, chief analyst at FXStreet, said: “Bets against the US Dollar seem a bit overdue, and USD/CAD recovered from a multi-week low of 1.3540 posted on Wednesday, resuming its decline on the back of softer-than-anticipated US inflation figures. Looking at the Canadian monthly employment survey, it is worth noting that the market is trading on sentiment, rather than on economic health. A solid report could initially trigger CAD’s strength, but market participants could quickly change their minds, and bet against the CAD on hopes the BoC will refrain from hiking further.”

When it comes to technical levels, Bednarik adds: “Measuring the latest decline between 1.3765 and 1.3540, the 38.2% Fibonacci retracement comes at 1.3626, the immediate resistance level. Steady gains above it expose the next relevant Fibonacci resistance, the 61.8% retracement at 1.3680. Gains beyond the latter seem unlikely amid broad US Dollar weakness. Should the pair turn south, support could be found in the low at 1.3540, while below the latter, 1.3470 comes into sight.”