The Canadian Dollar (CAD) rose against the US Dollar (USD) on Friday as a stronger-than-expected labor force survey boosted sentiment around the Canadian dollar. At the time of writing, USD/CAD is trading near 1.3889, falling to its lowest level since September 25 as traders respond to upbeat employment numbers in Canada.
Statistics Canada reported that the economy added 53.6,000 jobs in November, sharply exceeding expectations for a modest decline of 5,000 jobs. This follows a strong increase of 66.6K in October, marking the third straight month of job creation.
The unemployment rate unexpectedly fell to 6.5% in November from 6.9%, beating market expectations for a rise to around 7.0% and representing the biggest monthly improvement since late 2021.
Wage growth also remained steady, with average hourly earnings rising 4.0% year-on-year, which is in line with the pace recorded at the same time last year. Meanwhile, participation fell to 65.1% from 65.3%.
The data reinforced expectations that the Bank of Canada will keep interest rates unchanged at its next policy meeting on December 10. In its decision in October, the Bank of Canada cut the interest rate by 25 basis points to 2.25% and indicated that this move may mark the end of the easing cycle, noting that the current situation is “almost adequate” for the economy.
A new Reuters poll published earlier today showed unanimous expectations among 33 economists that the Bank of Canada will keep interest rates at 2.25% next week. The majority, 18 out of 29, expected interest rates to remain unchanged at least until 2027.
In the US, attention now turns to a busy round of economic releases scheduled for later in the day, including personal consumption expenditures (PCE), personal income, personal spending, and preliminary readings on consumer confidence from the University of Michigan and inflation expectations.
Together, these indicators will help shape expectations about the Federal Reserve’s (Fed) policy path, as investors remain largely convinced that the Fed is on track to deliver another rate cut at next week’s monetary policy meeting.
Bank of Canada FAQs
The Bank of Canada (BoC), headquartered in Ottawa, is the institution that sets interest rates and manages Canada’s monetary policy. It does this at eight scheduled meetings annually and ad hoc emergency meetings held as appropriate. The Bank of Canada’s primary mandate is to maintain price stability, which means keeping inflation at a level of 1-3%. The main tool for achieving this is raising or lowering interest rates. Relatively high interest rates usually lead to a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme cases, the Bank of Canada can enact a policy tool called quantitative easing. Quantitative easing is the process by which the Bank of Canada prints Canadian dollars for the purpose of purchasing assets—usually government or corporate bonds—from financial institutions. Quantitative easing usually leads to a weaker Canadian dollar. Quantitative easing is considered a last resort when simply lowering interest rates is unlikely to achieve the goal of price stability. The Bank of Canada used this measure during the Great Financial Crisis of 2009-2011 when credit froze after banks lost confidence in each other’s ability to repay debts.
Quantitative tightening (QT) is the opposite of quantitative easing. It is implemented after quantitative easing when the economic recovery is underway and inflation begins to rise. Whereas in QE, the Bank of Canada buys government and corporate bonds from financial institutions to provide them with liquidity, in QE, the Bank of Canada stops purchasing any more assets, and stops reinvesting the capital owed on the bonds it already holds. It is usually positive (or bullish) for the Canadian dollar.
