Canadian Dollar: Labour strength and BoC stance – TD Securities

TD Securities economists Robert Both and Emma Lawrence highlight a strong Canadian labour market, with July employment up 75k and unemployment at 6.4%. Despite employment outpacing population growth and the employment rate at its highest since February 2025, they expect the Bank of Canada to stay on hold through 2026, returning to neutral policy in early 2027.

Jobs outpace population, BoC still patient

"The Canadian labour market was firing on all cylinders in July with another 75k jobs created to easily surpass expectations (TD & market) for another 20k print, as the unemployment rate fell another 0.1pp to 6.4% (lowest since 2024) despite a 0.1pp increase to the participation rate."

"Details were upbeat, with the private sector leading job growth and an even split between full/part-time employment. Hours worked rose 0.6% m/m, while wage growth slowed to 3.0% y/y with help from base-effects."

"The Bank of Canada was reluctant to embrace the recent stabilization at its last policy decision, where it acknowledged the job growth over May/June but repeated that labour market conditions remain soft. With job growth outpacing the population over the last six months, we could see the Bank shift its tone in September."

"However, there is still material slack in the economy even with a 6.4% unemployment rate, and with core inflation running below 2% the Bank can stay patient. We still look for the Bank to stay on hold through 2026, with a return to neutral in early 2027."

"On the CAD side, recent developments in the Canadian economy have evolved broadly in line with our forecasts. While the data surprise is briefly pushing USD/CAD below the 1.40 support level, we think the bearish USD momentum may not sustain unless US CPI also surprises lower to allow market to price out near-term Fed rate hiking odds."

"The sharp USD/CAD reaction to the contrasting payroll outcomes suggests the market remains focused on both central-bank divergence and Canada's domestic outlook. On the USD side, next week's US CPI report will be the next major test for near-term Fed rate hike pricing."