Published: May 15th, 2024
A sudden surge in part-time employment probably won't stop the Bank of Canada (BoC) from cutting interest rates next month, analysts say.
The Canadian Dollar got a lift following news that 90,000 new jobs were created in April, smashing consensus forecasts in the 20,000 range. The country’s unemployment rate also held firm, steady at 6.2 per cent month to month, despite forecasts of an increase.
Market expectations of a rate cut in June fell back following the jobs print, pressuring the US Dollar to Canadian Dollar exchange rate to 1.3650. Loonie strength might be short-lived however, as a deeper look reveals that more than half of the job gains were in part-time work.
An analyst note from CIBC said the headline employment figure appeared to indicate a major recovery, but the data wasn’t as strong as it appeared.
“Most of the new jobs were part-time roles, many of which can be explained by Canada’s population growth. It would be a mistake to overinterpret a single piece of data so the narrative for CAD hasn't really changed in our view."
The average hourly wage for full-time employees, a signal watched closely by central bank policymakers, fell to 4.8 per cent.
CIBC also said there was ‘slack’ in the Canadian economy, which is still rising. "Canada’s labor force grew by 110,000 people from one month to the next, outpacing jobs created."
In March, National Bank of Canada (NBC) predicted a bout of Canadian Dollar weakness over the next few months as the Ottawa central bankers face up to the fact that interest rate policy is too restrictive.
NBC analysts described positive Q1 performance by the Loonie as ‘lukewarm’, especially when contrasted with other commodity currencies like the New Zealand and Australian Dollars.
Calling CAD ‘the weakest amongst the strong’, they blamed low performance against other commodity currencies on underwhelming economic figures.
In a note to investors the bank parsed recent Canadian economic data and pulled out areas of weakness undermining Q4 GDP growth statistics, among them confirmation that Canadian domestic demand had fallen for the first time in 12 months.
NBC said the tepid fundamentals of the Canada’s economy could be blamed on Bank of Canada (BoC) interest rate policy, which at five per cent is draining vitality and hindering growth.
‘The downside of the BoC’s restrictive monetary policy is easier to see when you look at private domestic demand, which shrank for two consecutive quarters and has now dipped four times in six quarters.’
‘The bank has lost the justification for maintaining such a restrictive monetary approach.’
In an echo of this week’s jobs print reaction, NBC also believed that Canada's most recent labor market print was overly optimistic, as the headline 41K expansion seen in February was inflated by public sector job postings. The bank noted that private-sector employment had sat more or less unchanged since June of 2023.
According to NBC, all of this indicated that the Bank of Canada would be compelled to cut interest rates. On a year-to-year comparison, inflation has already fallen back to Ottawa’s 1-3 per cent target range, currently 2.9 per cent.
In April of 2023, the Loonie received a shot in the arm as oil prices rose by more than 8 per cent in the wake of a surprise production cut pledge by the OPEC+ group.
Markets were blindsided by an announcement from the crude cartel that saw members agree to slash nearly 1.7 million barrels of oil per day from May 2023 through to December. The Saudis agreed to the most extensive cuts, scaling back production by 500,000 barrels per day.
An analysis by Bloomberg said the move would give support to petro-currencies like CAD. While the cuts would tighten crude supply, the world economy would see a fresh inflationary jolt as a side effect.
Central banks were expected to act, meaning more rate increases than markets had priced-in before the OPEC+ bombshell. At the time (early April), USD/CAD was close to dipping below a bullish trend line after reaching some key support levels.
Alongside the Saudis, Russia extended a previously announced cut of 500,000 barrels per day through to year-end. Several other Gulf states also joined the group policy and announced their own cuts.
A production cut of nearly 1.7 million barrels of oil per day was significant, Bloomberg said, and would meet the cartel’s aim of keeping crude prices supported.
The USD/CAD rate was also impacted by improving risk appetite across financial markets. The US Federal Reserve had been signaling that rate increases might be paused, putting the Greenback on the back foot.
The core PCE Price Index, which is the Fed’s benchmark inflation gauge, came in weaker than expected on Friday 31st March. The OPEC+ announcement followed the next day and will likely compel Fed policymakers to re-think rate decisions.
Meanwhile this week could be a busy one for CAD bulls, with Canadian employment reports, private payrolls and ISM services PMI all due before week's end.
As recently as December 2022, analysts were saying the return of declining crude oil prices would pull the Canadian Dollar down in 2023.
Analysts at Bank of Montreal (BMO) said a (then) recent dip in oil prices looked like a long-term trend, and is contributing to the Loonie’s recent decline. They do say, however, that an oil price recovery is expected next year. That would give CAD some support.
‘The unexpected decline in oil prices over the past seven days has trickled through to forex markets in the ways we would expect,’ wrote BMO in a recent currency briefing. For the Canadian Dollar, that’s manifesting as underperformance linked to oil market dynamics. ‘The surprising shift in crude prices is hammering commodity currencies like CAD.’