Canada Unemployment Rate falls to 5.7% beating expectations

• Unemployment Rate shrank to 5.7% in Canada in January from 5.8% previously.
• Canadian economy added 37,300 jobs, above expectations of 15,000. 
• Canadian Dollar rises modestly after the report, USD/CAD extends slide,

Canadian dollar buyers welcomed employment news. Statics Canada reported that the Unemployment Rate fell from 5.8% in December to 5.7% in January, much better than the 5.9% expected, while the Participation Rate declined to 65.3%. Furthermore, the Canadian economy added 37,300 jobs in January, more than the market consensus of 15,000.  Finally, Average Hourly Wages increased 5.3% from a year ago. 

Market reaction

The USD/CAD extended its slide to fresh weekly lows with the news, and traded as low as 1.3412, bouncing modestly afterwards. Broad US Dollar weakness maintains the pair near the aforementioned low ahead of Wall Street’s opening.

Key takeaways from Canada’s employment report: 

Employment increased by 37,000 in January, following three months of little change. The employment rate fell 0.1 percentage points to 61.6%, as population growth (+0.4%) outpaced employment growth (+0.2%).

The unemployment rate fell 0.1 percentage points to 5.7%, the first decline since December 2022.

The participation rate fell 0.2 percentage points to 65.3% in January 2024, as the number of people in the labour force held steady and the population aged 15 and older rose.

Employment increased in Ontario (+24,000; +0.3%), Newfoundland and Labrador (+7,500; +3.2%), Manitoba (+6,900; +1.0%) and Nova Scotia (+3,700; +0.7%). It declined in Saskatchewan (-6,200; -1.0%).

There were employment gains spread across several industries in the services-producing sector, led by wholesale and retail trade (+31,000; +1.1%) as well as finance, insurance, real estate, rental and leasing (+28,000; +2.1%). There were declines in other industries, led by accommodation and food services (-30,000; -2.7%).

Total hours worked in January rose 1.1% from one year earlier and were up 0.6% in the month.

Average hourly wages among employees rose 5.3% on a year-over-year basis in January (+$1.74 to $34.75), following an increase of 5.4% in December 2023.

Statistics Canada is scheduled to release the Canadian Labor Force Survey report at 13:30 GMT on Friday. Consensus among market participants expect the labour market report to come in on a mixed tone, somehow reinforcing the latest decision by the Bank of Canada to maintain its interest rates unchanged.

After holding its interest rates at 5.00% for the fourth consecutive meeting in January,  the Bank of Canada suggested at that meeting that it is still premature to start considering reducing the bank’s interest rates as policymakers need more progress in key fundamentals to begin thinking of interest rate cuts. The bank maintained the key interest rate at 5.0% since its September policy meeting.

At the latest event, the BoC kept further tightening on the table in case inflationary pressure regains traction. On Tuesday, Governor Tiff Macklem said that “the policy interest rate at 5% is the level we believe is necessary to alleviate the remaining pressure from inflation”, while he mentioned that the discussion regarding future policy is transitioning from questioning whether monetary policy is restrictive enough to deliberating on how long to uphold the current stance.

It is worth recalling that inflation figures tracked by the Consumer Price Index (CPI) rose at an annual rate of 3.4% in the last month of 2023, bouncing to levels last seen in May of the last year.

According to Statistics Canada, the economy experienced a marginal gain of 0.1K jobs in December, extending the streak of job creation for the sixth consecutive month since the drop in employment was recorded in July (-6.4K).

Still around key indicators, Canadian Gross Domestic Product (GDP) unexpectedly contracted by an annualized rate of 0.3% in the October-November period following a 0.3% expansion in the previous quarter and a 0.6% gain in Q1 2023.

What to expect from the next Canadian Unemployment Rate print?

The spotlight remains on the forthcoming Canadian labor market report, particularly wage inflation data, which could exert some influence on the BoC’s plans to start trimming its policy rates.

Economists anticipate a slight uptick in Canada’s Unemployment Rate to 5.9% in January, up from December’s 5.8%. In addition, it is expected that the economy will add 15K jobs during the last month, following a marginal 0.1K gain in the last month of 2023. Average Hourly Wages, a metric closely monitored by the Bank of Canada, increased by 5.7% in December compared to the previous year.

From the BoC’s Minutes released on February 7, rate-setters voiced their apprehension regarding sustained wage pressure and short-term inflation forecasts that persist significantly higher than pre-COVID levels. They highlighted that a widened output gap is expected to alleviate inflationary pressures.

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

The Canadian Unemployment Rate for January, accompanied by the Labor Force Survey, will be released on Friday at 13.30 GMT.

Should domestic job creation lose traction in line with a moderation in wage inflation, it could persuade markets that the BoC could finally transition to an easing cycle in the relatively short-term horizon. In such a scenario, the Canadian Dollar is likely to face additional selling pressure. Conversely, if the labour market report delivers an upside surprise, it would reinforce the view that the central bank could keep the current restrictive stance for longer than anticipated, at the same time encouraging the Canadian Dollar to resume its weekly appreciation.

Pablo Piovano, US Session Manager and Senior Analyst at FXStreet, notes, “USD/CAD hovers around the critical 200-day SMA near 1.3480. A sustained drop below this region is expected to open the door to a deeper retracement in the near term, initially targeting the late January lows near 1.3360 (January 31). A subsequent pullback should not see any contention of note until the December lows around 1.3180, although this scenario appears unlikely, as it would need a sudden and sharp deterioration of the outlook for the Greenback.”

On the flip side, Piovano adds, “the upside potential appears so far limited by the transitory 100-day SMA around 1.3555. The breakout of this region should find an immediate target at the December peaks near 1.3620.”