It is always difficult to untangle the true driver behind the USDCAD move on Friday’s where the Labour Force Survey data is released at the same time as the Nonfarm Payrolls data, and today was no exception.
After an initial rally by the loonie due to the level of employment gains matching expectations (245.8K vs F: 250.0K), the dollar bounced back, sending USDCAD back above the 1.31 level. A minor beat in the US employment data (1371K vs F:1350K) and a rise in average hourly earnings of 0.4% was enough to give the dollar the edge over the loonie this afternoon. However, despite the currency weakening, the underlying dynamics of today’s labour force survey remained somewhat positive, even if this is the last substantial jump in employment.
The data for August showed that the employment gains were concentrated in full-time work, with 205.8K of the 245.8K jobs added being in full-time work.
With temporary layoffs declining by 230,000, most of the job gains were driven by workers being re-hired due to either lockdown measures resulting in businesses re-opening or demand conditions picking back up. With today’s data encapsulating the re-opening of Toronto at the end of July, it is likely to be the last bumper net change in employment as the stimulus from the initial re-opening fades. This means that here on in, the data will be more reflective of the underlying structural damage inflicted by the pandemic, with the best measure likely to come in December’s data release for November’s labour market. At such point, the labour market data will be less tainted by the impacts of the CERB scheme.
The level of labour market scarring is of primary concern for fiscal and monetary authorities, with many European nations extending support schemes into 2021.
The focus by the Federal Reserve away from inflation and onto the labour market further highlights this, and without explicitly stating so, the Bank of Canada will have done the same. It is likely that when the Bank states the recovery is “well underway”, in matter of fact this largely means the labour market has recovered most of its job losses and wage growth is back on track. Today’s release highlighted that this may be some way off, with full-time employment sitting at 93.9% of pre-virus levels and part-time at 96.1% – although we don’t expect these figures to approach 100% before the BoC starts to discuss an exit strategy.
Today’s data release also has limited repercussions for next week’s Bank of Canada meeting, which in our opinion is already spoken for with the central bank expected to maintain a holding pattern.
At the margin, concerns over the impact of the withdrawal of the CERB scheme on the economic recovery will be the most pressing issue, especially with household debt levels so elevated. However, the central bank still has plenty of room to expand its balance sheet and adapt to this scenario if it should arise. The only other concern for Macklem and co will come in the relative strength of the Canadian dollar. While the Bank doesn’t explicitly reference the currency unless it deviates substantially from economic fundamentals, and thus poses a risk to inflation and growth, it must be noted that back in October 2019’s meeting and January 2020’s Governor Poloz verbally weakened the loonie at current levels – this could be on the cards for Macklem at next week’s speech to the Canadian Chamber of Commerce meeting.
USDCAD rises back above 1.31 as the market favours the beat in NFP over the labour force survey data
Canada’s labour market adds 245,800 jobs, with most concentrated in full-time work
Author: Simon Harvey, FX Market Analyst