Canada’s employment data for January are due out on Friday at 1330 GMT and forecasts point to a relatively soft report. That said though, considering the remarkable progress the labor market has posted in recent months, some moderation appears quite normal, and may be of little concern to Bank of Canada (BoC) officials.

The Canadian labor market has been on a tear in recent months. In December alone, the unemployment rate declined to 5.7% from 5.9% previously, even as the labor force participation rate rose, signaling both that the economy added jobs at a robust pace and that a greater number of people were interested in finding jobs. In January though, the jobs market is projected to have lost some of its momentum. The unemployment rate is anticipated to tick back up to 5.8%, and the net change in employment is expected to have declined significantly, but to remain in positive territory.

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Major gauges of the labor market showed mixed results during the month, thus providing little help in determining whether an upside or a downside surprise is more likely in the jobs data. Specifically, the Markit manufacturing PMI showed that manufacturers increased their staffing numbers at the steepest pace since last August, but the Ivey PMI printed a decline in its employment sub-index, suggesting that the pace of jobs growth slowed in the month.

At the time of writing, markets have fully priced in another two quarter-point rate hikes by the BoC this year, and also see a 40% probability for a third, according to Canada’s overnight index swaps. Should the unemployment rate simply rise to 5.8% as expected, that is likely to have little impact on expectations regarding how many hikes the BoC will deliver. For policymakers, what matters most is the trend in employment, and not a single month’s worth of data. As long as any softness is modest and remains limited to January, the BoC is likely to view such an effect as being transitory. Thus, in case the actual data are in line with the forecasts, the reaction in the loonie may be relatively limited.

Now, in the scenario that the unemployment rate rises by more than expected, to 5.9% for example, that could dent expectations for three more BoC hikes this year and thereby, weigh on the Canadian dollar. In such a case, dollar/loonie is likely to spike higher and potentially test the 1.2650 zone, marked by the lows of December 6. A decisive break above that hurdle could open the way for the round figure of 1.2700.

On the flipside, should the data come in stronger than projected, for instance with the unemployment rate staying unchanged or even declining, then the CAD is likely to come under renewed buying pressure as investors price in the prospect of even faster tightening by the BoC. Dollar/loonie could thus edge lower, and perhaps test the 1.2485 support level. If sellers are strong enough to overcome that territory, then the 1.2400 barrier could come into play, identified by the lows of February 5.

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