Canadian Labour Market Strengths Won't Shift BoC's Hands Soon
TD Securities economists Robert Both and Emma Lawrence highlighted a strong Canadian labour market in their analysis of July's employment numbers.
The data showed that Canada added 75,000 jobs in July, exceeding expectations by 55,000. The unemployment rate fell to 6.4%, the lowest level since 2024.
Despite the robust job growth, which has outpaced population growth over the past six months, Both and Lawrence expect the Bank of Canada (BoC) to maintain its current stance through 2026. They anticipate a return to neutral policy in early 2027.
The economists attributed the BoC's patience to material slack in the economy, even with an unemployment rate at 6.4%. Core inflation is also running below 2%, allowing the central bank to stay on hold.
On the currency front, the Canadian dollar (CAD) has reacted sharply to the jobs data, pushing USD/CAD below the 1.40 support level. However, Both and Lawrence expect this momentum to be short-lived unless US Consumer Price Index (CPI) surprises lower, allowing market participants to price out near-term Federal Reserve rate hike odds.
The next major test for Fed rate hike pricing will come with the release of US CPI data next week.