Employment numbers will be watched out of Canada on Friday at 12:30 GMT as investors are on the lookout for fresh rate clues after the Bank of Canada said it could move quicker in removing monetary stimulus. The BoC’s increased confidence on the rate outlook hasn’t transpired to a stronger Canadian dollar, however, as market pricing of future rate hikes hasn’t shifted dramatically, according to overnight index swaps.
Jobs growth is anticipated to have slowed in October, following a 63.3k surge in September. Employment is expected to have risen by 10k last month, while the unemployment rate is forecast to hold steady at 5.9%. There’s been a notable cooling off in the labour market in 2018 with a patchier employment growth compared to 2017, which was characterized by solid jobs gains each month. Moreover, growth in full-time jobs has been very weak since May and this has coincided with an easing in wage growth.
If this trend was to continue over the next few months, the Bank of Canada would have less reason to speed up the pace of interest rate increases. However, with an economy considered to be operating near full capacity, softer wage growth may not necessarily deter the BoC from raising rates more aggressively in the coming months.
With uncertainty surrounding Canada’s trading relations with its southern neighbours removed, and businesses upbeat about the year ahead, the Bank of Canada is firmly on track to raise its overnight target rate a few more times over the next 12 months. However, this was already priced in by the markets and investors are not anticipating more than one increase per quarter at this point, despite the BoC dropping reference to “gradual approach” from its policy statement at its meeting on October 24.
While policymakers have been keen to stress that the change in the statement language meant that the pace of tightening could be faster or slower, depending on the data, it’s clear that the BoC intends to keep hiking rates. Speaking before a parliamentary committee on Tuesday, BoC Governor Stephen Poloz reiterated this view, saying “the policy rate will need to rise to neutral to achieve our inflation target”.
The BoC’s hawkish stance doesn’t appear to be doing much for the Canadian dollar, however. Even the boost from the announcement of the NAFTA deal was short-lived and the loonie has been weakening during the past month. The global risk-off environment and lower oil prices have been weighing on the loonie. But given a more data-dependent BoC, Friday’s employment report could still trigger some short-term moves in forex markets.
A stronger-than-expected report could pull dollar/loonie initially towards the 50% Fibonacci retracement of the downleg from 1.3385 to 1.2778, around 1.3082. A drop below the 50% Fibonacci would drive the pair towards the 50-day moving average, which is converging with the 38.2% Fibonacci around 1.3010. Should there be an even sharper rally for the loonie, the pair could slip as low as the 23.6% Fibonacci at 1.2921, which is being intersected by the 200-day moving average.
However, should the jobs data fall short of analysts’ forecasts, dollar/loonie could break above the immediate resistance at the 61.8% Fibonacci at 1.3153. A climb above this level would open the path for the 78.6% Fibonacci at 1.3255. Clearing this zone would put the pair back within range of June’s one-year high of 1.3385.
