USD/CAD slides to a two-month low after Canada’s jobs beat; eyes on US PCE
- USD/CAD extends its decline as upbeat Canadian labour data strengthens the Loonie.
- Canada adds 53.6K jobs in November, while the jobless rate drops sharply to 6.5%, beating expectations.
- Markets turn to US PCE and UoM sentiment readings for guidance on the Fed’s next move.
The Canadian Dollar (CAD) strengthens against the US Dollar (USD) on Friday as a stronger-than-expected Labour Force Survey boosts sentiment around the Loonie. At the time of writing, USD/CAD is trading near 1.3889, slipping to its lowest level since September 25 as traders respond to Canada’s upbeat employment figures.
Statistics Canada reported that the economy added 53.6K jobs in November, sharply beating expectations for a modest 5K decline. This follows a strong 66.6K increase in October, marking a third consecutive month of job creation.
The Unemployment Rate unexpectedly fell to 6.5% in November from 6.9%, beating market expectations for a rise to around 7.0% and marking the largest monthly improvement since late 2021.
Wage growth also held steady, with average hourly earnings rising 4.0% YoY, matching the pace recorded at the same time last year. Meanwhile, the participation rate slipped to 65.1% from 65.3%.
The data reinforced expectations that the Bank of Canada (BoC) will keep interest rates unchanged at its upcoming policy meeting on December 10. In its October decision, the BoC cut its policy rate by 25 basis points to 2.25% and signaled that this move could mark the end of the easing cycle, noting that the current stance is “about right” for the economy.
A fresh Reuters poll published earlier in the day showed unanimous expectations among 33 economists that the BoC will keep its policy rate at 2.25% next week. A majority, 18 of 29, also projected that interest rates will remain unchanged at least until 2027.
In the United States, attention now turns to a busy round of economic releases due later in the day, including Personal Consumption Expenditures (PCE) inflation, Personal Income, Personal Spending, and the preliminary University of Michigan Consumer Sentiment readings and inflation expectations.
Together, these indicators will help shape expectations for the Federal Reserve’s (Fed) policy path, with investors still largely convinced that the Fed is on track to deliver another interest rate cut at next week’s monetary policy meeting.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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