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The Canadian labor force survey report released by Statistics Canada is scheduled to be released at 20:30 Beijing time on June 9. The market expects the unemployment rate to rise to 5.1% in May from 5% in April. Employment rose by 41,400 in April and is expected to increase by 23,200 in May.
The Bank of Canada (BOC) unexpectedly raised its policy rate by 25 basis points (bps) to 4.75% earlier this week, after holding rates steady at 4.5% in March and April. Upcoming labor market data could affect the performance of the Canadian dollar (CAD) against its rivals. Stronger-than-expected gains in wages and wage inflation, as measured by average hourly earnings, could help the loonie gather strength against its rivals, suggesting the Bank of Canada may continue to tighten its policy. On the other hand, if the jobs report shows loosening in the labor market, the currency may struggle to find demand.
How does the unemployment report affect Bank of Canada policy?
The Bank of Canada cited growing concerns that consumer price index (CPI) inflation was well above its 2% target as the main reason for its decision to raise the policy rate. The Bank of Canada reiterated that labor market conditions in Canada remain tight, explaining further:
“Higher immigration and participation rates are expanding the supply of workers, but new workers have been hired rapidly, reflecting continued strong demand for labour.”
Barring a marked chill in the job market, the Bank of Canada should maintain its focus on taming inflation, which could translate into a rate hike in July. Economists at Citigroup said in a recent note to investors that they now expect the People’s Bank of China to raise the key interest rate to 5% at its next policy meeting. Annual wage inflation was 5.2% in April. A reading close to this figure, combined with healthy wage growth, meeting or exceeding market expectations, should allow the Bank of Canada to consider tougher policy.
On the other hand, a sharp drop in annual wage growth and a disappointing near-zero net change in employment could make markets reconsider the BoE’s policy outlook, at least ahead of May’s CPI inflation data.
When will the Canadian unemployment rate be released in May, and how will it affect USD/CAD?
Canada’s unemployment rate in May will be released together with the labor force survey report at 12:30 on Friday, June 9, Beijing time. The market is expecting a modest increase in employment in May and sees the unemployment rate rising to 5.1% from 5%. Investors are unlikely to hold large U.S. dollar (USD) positions ahead of next week’s U.S. CPI data and the Federal Reserve’s policy statement. Therefore, the Canadian employment report may influence the direction of USD/CAD ahead of the weekend.
As mentioned above, the Canadian dollar’s reaction to the jobs data should be immediate due to the potential impact on the Bank of Canada’s interest rate outlook. A stronger-than-forecast increase in employment change coupled with sticky wage inflation could give the CAD a boost and lead to a stretch lower in USD/CAD, and vice versa.
The daily chart shows that the relative strength index (RSI) indicator fell below 40 after the Bank of Canada hiked interest rates on Thursday, suggesting that bearish momentum is building for USD/CAD. On the downside, first support lies at 1.3300 (psychological level), then at 1.3200, where the 50% Fibonacci retracement of the August-November uptrend is located.
If USD/CAD gains bullish momentum after the jobs data, it could face first resistance at 1.3400 (psychological level, static level) before 1.3450 (Fibonacci 38.2% retracement). A daily close above the latter could open the door for a longer-term rally towards 1.3500 (100-day, 200-day simple moving average).
