Anticipated increase in unemployment rate in Canada

• Canada’s unemployment rate is expected to rise further in July.
• Further cooling in the labor market could favor further rate cuts.
• The Canadian dollar remains firm so far in August against its US counterpart.

Statistics Canada is set to release the Canadian Labor Force Survey report on August 9. Market participants so far expect the report to show mixed results, which could further support the Bank of Canada’s (BoC) ongoing easing cycle.

In July, the Bank of Canada cut its policy rate by an additional 25 basis points to 4.50%, following a quarter-point rate cut at its June meeting. Returning to its last meeting, the central bank left the door open for further rate cuts if inflation continues to progress towards the bank’s target, while it expects consumer prices to hover around the 2.0% target in the latter part of the year 2025.

Regarding the domestic labor market, the BoC signaled in June that although it has cooled significantly, wage growth is still high relative to productivity growth.

Statistics Canada reported that Employment Change fell by 1.4k jobs in June, halting two consecutive months of gains, while the Unemployment Rate rose for the third month in a row to 6.4% .

On another key economic indicator, the central bank now sees Canadian Gross Domestic Product (GDP) growing by 1.2% in 2024 (from 1.5%), while annualized GDP is expected to expand by 1.7% in Q1, by 1.5% in Q2. and by 2.8% in Q3.

What can we expect from the next printout of the Unemployment Rate in Canada?

Attention is being paid to the upcoming Canadian labor market report, particularly wage inflation data, which could influence the bank’s decision on whether to cut interest rates further.

The consensus among market participants is for a slight increase in Canada’s unemployment rate to 6.5% in July from 6.4% in June. Additionally, investors expect the economy to add nearly 27,000 jobs in the same month, reversing a 1.4-thousand decline in June. It’s worth recalling that average hourly wages, a measure of wage inflation, rose for the second consecutive month in June, up 5.2 percent from June’s 4.8 percent gain.

The minutes of the BoC’s July meeting, published on August 7, revealed that before their decision to cut rates last month, officials expressed concern that consumer spending in 2025 and 2026 could be considerably weaker than anticipated.

According to analysts at TD Securities: “We expect employment to rise by 30,000 in July on a pick-up in services sector employment, although this will not be enough to prevent the EU rate from rising by 0.1 percentage points to 6.5%. More weakness in the labor market should boost the BoC’s confidence that inflation/wage pressures will continue to ease, but wage growth will remain too high for the BoC’s comfort even with a deceleration of 0.5 percentage points to 5.1%”.

When is the July Canadian unemployment rate released and how could it affect USD/CAD?

The Canadian Unemployment Rate for July, accompanied by the Labor Force Survey, will be released at 12:30 GMT on Friday.

Further cooling in the labor market should leave the door wide open for the BoC to cut its interest rate at its next meeting, while putting some selling pressure on the Canadian currency. This favors some reversal of the strong monthly pullback in USD/CAD so far.

The rally in USD/CAD started in mid-July, sending the pair up to the 1.3950 region for the first time since October 2022. However, the Canadian dollar has managed to relinquish some of these losses since then and started to recover in above. momentum, which caused USD/CAD to pull back significantly to the 1.3700 low earlier this week, a region also adjacent to the interim 55-day SMA.

According to Pablo Piovano, senior analyst at FXStreet, further pullbacks should not be ruled out on the near-term horizon, with the spot expected to meet provisional support at the 55-day and 100-day SMAs at 1.3714, respectively, and, 1.3689 respectively, ahead of the most relevant 200-day SMA at 1.3601. The latter reinforces the July low of 1.3584 (July 11) and should act as a decent contender for now.

Should the bulls regain their advantage, Pablo adds that the immediate target for USD/CAD appears at the 2024 high of 1.3946 (August 6), ahead of the 1.4000 benchmark.