Canada Employment: Foreshadowing for Central Banks?

Canada Employment: Foreshadowing for Central Banks?
Tomorrow Canada will report its monthly labor statistics. Normally this data gets overshadowed by the release of US NFP at the same time. But this time Canada is reporting one week after the US, giving the traders to look at the data independently. And this can provide some valuable insight into not just the loonie, but what could be in store for the greenback.

Canada is very closely tied economically to the US, as the largest trade partner and sharing the only land border. The US imports a lot of oil from its northern neighbor, but also a lot of industrial goods, and raw materials. Conversely, Canada imports a lot of consumer goods from south of the border. This is particularly relevant for insight into what will happen when it comes to inflation and monetary policy.

The Canary in the Coal Mine

The interconnection with the US means that Canada often sees the effects of what’s going on south of its border. But also being a smaller, trade dependent economy, it can experience wider moves than the US. Sometimes those moves happen before they do in the US, simply because it takes longer for an effect to make its way through a larger economy.

The other factor is that typically the BOC holds its rate decision meetings a little before the Fed in each meeting cycle. Central banks meet around ten times a year, give or take a meeting or two. This roughly translates into a meeting once every six weeks, with the central banks concentrated around each other, in what’s often called a “cycle”. So, for example, the ECB, Fed and BOE will all meet in the early part of June, and this is referred to as the “June” rate cycle. And in that cycle, the BOC will hold its rate decision before the Fed does.

Getting a Jump on the Moves

That position of the BOC means that it can often “lead” the Fed in terms of monetary policy moves. That is, ending a rate hiking cycle before the Fed does, or cutting before its larger southern counterpart. There obviously isn’t a one-to-one correlation, but the timing and deep interconnection between the economies can provide some insight into what might happen with the greenback by taking into account what the BOC is doing.

As traders are seeing a pullback in the US economy, and wondering when that will incline the Fed to cut, Canada is seeing that happen sooner and faster. The US labor market up until last month was extraordinarily strong, while the Canadian jobs market was showing progressive weakness. The US is, in effect, catching up to Canada. Which is why the upcoming data, and how it might be interpreted by the BOC, could be relevant to traders who are not just focused on the Loonie.

What to Look Out For

Canada’s unemployment rate is expected to continue to tick higher, rising to 6.2% from 6.1% previously. This is well above the structural level, and could be interpreted by the BOC as a sign that consumer demand might falter substantially, and necessitate lower rates soon. But, average hourly wages are expected to remain resilient, growing at 4.9%, though down from 5.0% prior.

The uneven distribution of available jobs and people looking for work in Canada has created a bit of a lopsided effect that elevates the unemployment rate. But the main dynamics remain that as the jobs market continues to loosen, it would lead to slowing growth in wages and easing pressure on inflation.

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