USD/CAD slumps back to multi-year lows under 1.2500 after blowout jobs report

• USD/CAD has come under heavy selling pressure in recent trade and dropped back to multi-year lows in the 1.2660s.
• The loonie has rallied hard in wake of a much stronger than expected Canadian labour market report.

The loonie is far and away the best performing currency in the G10 this Friday and is the only currency to be trading on a firmer footing versus the US dollar. Strength is not coming from the broader market; indeed, the risk appetite is quite fragile (stocks and commodities mostly lower) amid concerns about rising US bond yields. Rather, recent CAD strength is coming from a significantly better than expected February Labour Market report.

USD/CAD is now back below the 1.2500 level and is currently probing the multi-year lows set back at the end of February in the 1.2460s. A break below this level would open the door (technically speaking) to a move back towards the early 2018 lows in the 1.2200s, US dollar permitting.

Recent CAD strength has propelled the currency into second place in this week’s G10 performance table, with the loonie up roughly 1.5% on the week versus USD and only lagging the NOK, which is up 1.6% versus the buck. In third place is the Aussie, up 1.4% on the week versus USD.

Blowout Labour Market Report

As was the case with the US jobs data last Friday, Friday’s February Labour Market Report out of Canada blew market expectations out of the water; the economy added 259.2K jobs, well above expectations that it would add 75K jobs, which more than makes up for the 212.8K jobs lost in January. This was driven by 88.2K in full-time employment gains and 171K in part-time job gains. Desks chalked up the faster than expected recovery in the jobs markets to recent easing of Covid-19 containment measures.

Much stronger than expected job creation helped to push the unemployment rate down to 8.2% from January’s 9.4%, a much larger than the expected drop to 9.2%. The drop in the unemployment rate was, however, helped slightly by a 0.2% fall in the participation rate, which is not a good sign. But overall, the report was a very strong one.

Capital Economics caution that, “if (they) were going to try to pick holes in the report, then it would be the slowdown in the pace of hiring elsewhere”, before noting that “together, professional services and finance, insurance & real estate employment increased by just 4,000, and construction and manufacturing employment both increased by less than 10,000”. However, the economic consultancy agrees that it was a strong report, “particularly considering that most of the country’s most populous region, the Greater Toronto Area, remained under full lockdown throughout February”.

With regards to the report's implications for BoC policy-making, Capital Economics comment that “while the strong report appears to increase the chance of the Bank of Canada taking a more hawkish stance at its next policy meeting in April, we think it will continue to err on the side of caution and hold off from adjusting its QE program until July, given 600,000 people remain out of work compared to a year ago”.