Canada Jobs Report Preview: Unemployment Rate forecast to rise

• The Unemployment Rate in Canada is expected to rise further in July.
• Further cooling of the labour market could favour extra rate cuts.
• The Canadian Dollar remains firm so far in August vs. its US peer.  

Statistics Canada is set to release the Canadian Labour Force Survey report on August 9. Market participants so far anticipate that the report will present mixed results, which could further support the Bank of Canada's (BoC) ongoing easing cycle.

In July, the Bank of Canada trimmed its policy rate by an extra 25 bps to 4.50%, following a quarter-point interest rate reduction at its meeting in June. Back to the last gathering, the central bank left the door open to further rate cuts if inflation continues to progress towards the bank’s target, while it projects consumer prices to hover around the 2.0% goal in the latter part of 2025.

Regarding the domestic labour market, the BoC signalled in June that while it has cooled significantly, wage growth is still elevated when compared to productivity growth.

Statistics Canada reported that the Employment Change shrank by 1.4K jobs in June, halting two consecutive months of increases, while the Unemployment Rate ticked higher for the third consecutive month to 6.4%.

On another key economic indicator, the central bank now sees the Canadian Gross Domestic Product (GDP) expanding by 1.2% in 2024 (from 1.5%), while it expects annualized GDP to expand by 1.7% in Q1, by 1.5% in Q2, and by 2.8% in Q3.

What can we expect from the next Canadian Unemployment Rate print?

Attention remains on the upcoming Canadian labour market report, particularly the wage inflation data, which could influence the bank’s decision on whether to continue reducing its interest rates.

Consensus among market participants projects a slight rise in Canada’s Unemployment Rate to 6.5% in July, up from 6.4% in June. Additionally, investors forecast the economy will add nearly 27K jobs in the same month, reversing June’s 1.4K decrease. It is worth recalling that Average Hourly Wages, a proxy for wage inflation, rose for the second time in a row in June, up by 5.2% vs. June’s 4.8% gain.

BoC’s Minutes from the July meeting, released on August 7, revealed that prior to their decision to cut rates last month, officials expressed concerns that consumer spending in 2025 and 2026 might be considerably weaker than anticipated.

According to analysts at TD Securities: “We look for employment to rise by 30K in July on a rebound in service sector hiring, although this will not be enough to keep the UE rate from climbing 0.1pp to 6.5%. More labour market slack should add to the BoC's confidence that inflation/wage pressures will continue to ease, but wage growth will remain too high for the BoC's comfort even with a 0.5pp deceleration to 5.1%”.

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

The Canadian Unemployment Rate for July, accompanied by the Labour Force Survey, will be released on Friday at 12:30 GMT.

Further cooling of the labour market should leave the door wide open for the BoC to trim its interest rate at its next meeting, exerting at the same time some selling pressure on the Canadian currency. This favours some reversal in the strong monthly pullback in USD/CAD so far.

The rally in USD/CAD sparked around mid-July, sending the pair to as high as the 1.3950  region for the first time since October 2022. However, the Canadian Dollar managed to give away part of those losses since then and has started regaining upside momentum, prompting USD/CAD to retreat markedly to the low-1.3700s earlier this week, a region also neighbouring the interim 55-day SMA.

According to Pablo Piovano, senior analyst at FXStreet, further retracements should not be ruled out on the short-term horizon, with spot expected to meet provisional support at the 55-day and 100-day SMAs at 1.3714 and 1.3689, respectively, prior to the more relevant 200-day SMA at 1.3601. The latter reinforces the July low of 1.3584 (July 11) and should act as decent contention for the time being.

In case bulls regain the upper hand, Pablo adds that the immediate target for USD/CAD emerges at the 2024 top of 1.3946 (August 6), prior to the 1.4000 milestone.