For the second time this week, the loonie has been rescued by the survey period failing to encompass the severe impacts containment and social distancing policies are having on the real economy. Following a dud event earlier on in the week, where the Bank of Canada Business Outlook Survey aged like a cheap bottle of wine left to stew in the sunlight before it was released, today’s labour market statistics again failed to show the true increase in unemployment due to the survey window.
The March Labour Force Survey, which consisted of 56,000 households and over 100,000 individuals, was conducted on March 15th-21st. While the survey week coincided with around 1 million Canadians filing for unemployment insurance, matching the official nominal unemployment increase of 1.01m as per today’s release, it failed to incorporate the further 1.5m increase in insurance claims in the weeks following until the end of the month. Even though the unemployment rate rose from 5.6% in February to 7.8% in March, given the rise in the number of insurance claims, some analysts project the headline unemployment rate could climb as high as 20%, surpassing the previous record of 13.1% from 1982.
While this is concerning, it again isn’t a true representation of the state of the economy at present…
Many claiming unemployment benefits will be doing so on a temporary basis purely due to the current containment policies rendering their job obsolete. Such workers will have a high elasticity to returning to work once the containment policies are lifted. The number of self-employed workers is a good metric for assessing the inflation rate of these labour market statistics as these workers fall into the category where the unemployment elasticity of containment is high. According to OECD data in 2018, 3m workers in Canada register as self-employed, or around 15% of total employment. Therefore, due to the high percentage of self-employed workers in the labour market, the current level of employment insurance claims may overstate the true number of jobs lost and therefore the economic damage of containment policies.
When combined with the Canadian government’s recent announcement to increase the eligibility criteria for its wage subsidy program, downside risks to such stark economic forecasts such as a 20% unemployment rate are plentiful as companies are more likely to now furlough workers as opposed to laying them off. Current claims data sits at more than 5m since containment policies were rolled out.
However, financial markets react to the data as they get it despite its quirks, and this was to be the case today as well. The loonie marginally rallied on the news that the number of unemployed only rose by 1.01m despite its staggering number. The fear of a torrid unemployment number has been resonating in the market since the early hours today with the Canadian dollar failing to join NOK in a mild spurt of strength on the back of optimism in oil markets. While the loonie has jumped one hurdle while holding the hand of the survey window, of course, a final challenge remains in the shape of OPEC+. The Canadian dollar has finally entered into green territory against the US dollar, mainly due to the Fed’s announcement of a new main street facility taking some edge off of the greenback, but this could soon be turned around should diplomatic relations break down in this afternoons 15:00 BST videoconference.
Graph: Loonie off the lows as unemployment figure undershoots markets expectations and greenback weakened by Fed measures
Author: Simon Harvey, FX Market Analyst