Canada Unemployment Rate Forecast: USD/CAD could rally on labor market slowdown

• Unemployment Rate is forecast to tick up to 5.1%, within a slower Canadian labor market.
• Canadian Dollar has been bullish for most of 2023, needs a stronger-than-expected labor market to keep rallying.
• Bank of Canada future path on monetary policy depends on employment and inflation figures.
  

The Canadian employment report, published by Statistics Canada, will be published on Friday, February 8 at 13:30 GMT. The Unemployment Rate is expected to rise a tad to 5.1% in January from 5% in December as the Canadian economy is forecast to have added only 15K jobs, way lower than the 104K in the previous month. 

As the Bank of Canada (BoC) closes in on the end of its tightening cycle, the labour market data could influence the Canadian Dollar’s (CAD) performance against its rivals. A stronger than expected growth in payrolls and wage inflation, as measured by the Average Hourly Earnings, could help the CAD gather strength against its rivals in the near term. On the other hand, the currency is likely to have a hard time finding demand if the jobs report reveals loosening conditions in the labour market.

Unemployment in Canada could rise a bit, will this affect Bank of Canada plans?

Earlier in the week, the Market Participants Survey for the fourth quarter of 2022 published by the Bank of Canada showed that the median of responses for the monetary policy rate by end-2023 stood at 4%, forecasting a 50 bps cut from the current level. Following the January policy meeting, the BoC hiked its policy rate by 25 basis points to 4.5% and noted that it is likely to hold the interest rate at this level while assessing the impact of cumulative rate increases on the economy. 

A cooldown in the jobs market could definitely allow BoC policymakers to start considering a policy pivot and weigh on the Canadian Dollar. Market expectations for the January Labor Force Survey report are indeed notably lower than the December figures, as economists expect a relatively small job growth (market consensus at 15K) and lightly higher Unemployment Rate (5.1%). 

In its policy statement, the Bank of Canada noted that it is prepared to increase the policy rate further if needed to return inflation to 2% target; continuing the quantitative tightening program. In December, annual wage inflation, represented by the Average Hourly Earnings, stood at 5.2%. A significant increase in that component is likely to be assessed as a factor that would limit the decline in consumer inflation. In that scenario, investors could refrain from betting on further Canadian Dollar weakness.

RBC Economics analysts agree with the market consensus on the release:

“The record squeeze on Canadian labour markets is unlikely to have loosened much in January. We look for a small increase in employment (roughly 5K workers) to add to the 176K surge in positions that played out over the prior four months. We also expect a tick up in the unemployment rate, to 5.1% – still just off multi-decade lows earlier in the summer.”

Will January Canada Unemployment Rate trigger USD/CAD rally?

The Canadian Unemployment Rate for January will be released within the publication of the Labor Force Survey on Friday, February 10 at 13.30 GMT. The market expects softer figures than in December throughout all the key indicators, which could play into the hands of USD/CAD bulls, who have recovered some ground in the past week, as the US Dollar (USD) rallied across the board after the super strong Nonfarm Payrolls data. 

Zooming out a bit, USD/CAD has declined since the beginning of the year amid the broad-based selling pressure surrounding the US Dollar. The pair’s losses, however, were limited as the impressive January jobs report from the US revived expectations for two more 25 bps Fed rate increases in March and May, helping the USD regather its strength.

The pair faces strong support at 1.3300 (psychological level, static level) ahead of 1.3230, where the 200-day Simple Moving Average (SMA) aligns. A daily close below the latter could be seen as a significant bearish development and open the door for an extended slide toward 1.3250 (former resistance, static level). For that type of reaction to occur, though, the jobs report needs to offer surprisingly strong figures in wages and payrolls to revive hawkish BoC monetary policy expectations.

On the upside, 1.3500 (50-day SMA, static level, psychological level) forms interim resistance before 1.3540 (100-day SMA). In case USD/CAD rises above that hurdle and starts using it as support, it could target 1.3700 (static level, psychological level) next. 

Canada unemployment report related content

• Canada Employment: Room for a pronounced CAD impact from a data surprise – ING.
• Canadian Employment Preview: Forecasts from five major banks, little if any gain.
• USD Index remains consolidative in the low-103.00s ahead of data, Fedspeak.

About the Employment Change

The Net Change in Employment is a measure of the change in the number of employed Canadians, provided in Statistics Canada's Labor Force Survey report. In general, an increase in this metric is favorable for consumer spending and it encourages economic expansion. A high rating is therefore viewed as favorable or bullish for the Canadian Dollar, whereas a low reading is viewed as unfavorable or bearish.

About the Unemployment Rate

The number of jobless employees divided by the entire civilian labor force yields the Unemployment Rate, posted by Statistics Canada. It serves as one of the main Canadian economy leading indicators. If the rate is higher, there hasn't been much growth in the Canadian labor market. As a result, a surge typically results in the Canadian Dollar depreciating. Otherwise, a decline in the number is typically considered favorable (or bullish) for the CAD.