Volatility in FX markets after the US and Canada jobs reports made up for the lack of price action in the first part of the trading day. While the US data missed forecasts and added just 210,000 new jobs compared to expectations of a 550k increase, Canada’s economy added 153.7k jobs vs the 37.5k expected. The loonie strengthened to session highs on the back of the data, while the US dollar saw opposite moves and tumbled to daily lows.
US labour market data: divergence in payroll figures and household survey has markets scratching their heads
Whilst US job growth posted the smallest increase of the year so far, the unemployment rate fell by more than forecasted. This mixed picture is a result of the two-fold composition of the jobs report: the employer survey indicated a slow-down in hiring, including declines in retail outlets and carmakers, while the household survey showed strong job growth. The most notable changes in the subcomponents included a 20k drop in retail trade payrolls vs a 38k increase in October, along with a mere 23k increase in hospitality and leisure payrolls after the robust 170k jump in October.
The headline number disappointed, but the quick retracement in EURUSD shows that markets are more focused on the drop in the unemployment rate and the rise in labour force participation, as this could support the Federal Reserve’s recently communicated plan to potentially taper QE faster than planned, given sustained inflation pressures.
Going into the release of the US labour market report, the biggest chance for a significant market reaction was on the downside miss, as this could derail expectations of quicker tapering by the Fed – something that was suggested by Fed Chair Powell earlier in the week when, for the first time, he admitted inflation is likely to be more persistent and a quicker taper would be adequate. On the flip side, the figure would have needed to be exceptionally strong to change market views after Powell’s commentary. Today’s mixed reading could point to measurement or modelling errors, which have led to the drastic divergence between the two surveys. This means markets may choose to look past the data beyond the immediate market reaction, until FOMC members comment on the data in the media.
US jobs market progress, % remaining until pre-pandemic levels
Canada labour market data: new jobs come in at four times the consensus
Canada’s economy adding 154k jobs in November shows the country is returning rapidly to pre-pandemic levels, especially with the unemployment rate falling to 6.0% compared to 6.7% in October. Hours worked rose to 0.7%, surpassing pre-pandemic levels. In recent releases, average hours worked was where the slack has been reduced, and with that dynamic continuing robustly this could raise concerns of sustained wage growth pressures – given that employers cannot increase production by increasing total hours, they will have to employ further but in a tight labour market.
Today’s data helps to keep the Bank of Canada on track to continue with their normalisation path, although near-tem downside risks have become more prominent recently given the emergency of the Omicron variant.
On balance, however, the progress in the labour market and inflationary pressures could position the Bank of Canada for earlier normalisation, especially given GDP is not near pre-pandemic levels yet but the labour market is already tightening sharply. Thursday’s speech by BoC Deputy Governor Gravelle will be in focus as market participants will analyse the tone to gauge how the Bank’s view on economic conditions have changed.
USDCAD falls to session lows as both legs of the pair move in opposite directions following diverging labour market reports
Author: Ima Sammani, FX Market Analyst