Employment numbers for April are due out of Canada on Friday (12:30 GMT) but as far as jobs reports go, this will be one that nobody will be looking forward to. Canada has been no exception in the global pandemic of the coronavirus and after losing one million jobs in March, the employment picture is about to get much worse. But as the economy faces a once in a generation crisis, the Bank of Canada’s newly appointed governor is causing a bit of a stir in the FX markets.
From bad to worse
As if the loss of one million jobs in a single month wasn’t dire enough, April likely proved even more catastrophic for Canada’s labour market. The number of people out of work is projected to have shot up by a record 4 million in April, pushing unemployment to an astonishingly high rate of 18.0% – another record – from 7.8% in March.
Canada has been in lockdown since March 18, and while the restrictions vary from province to province, much of the country has ground to a halt, which can only have come at a huge economic cost. That cost will be crudely reflected in Friday’s jobs report. But despite all the gloom and the uncertain path ahead as scientists face a race against time to find a vaccine for the virus, there is still hope that a V-shaped recovery is not too farfetched, at least in the jobs market.
Lockdown easing may limit further job losses
Like many other countries, Canada has begun to loosen some of its restrictions, with several provinces allowing some retailers and businesses to reopen. Assuming that all goes to plan and a second wave of infections can be avoided, the April jobs figures may be as bad as they get.
The question now is how quickly will economic activity return to normal and how many businesses will the stimulus packages from the government and central bank manage to save from going bust. The Canadian government has responded with a sizeable fiscal aid amounting to C$202 billion. The Bank of Canada’s emergency asset purchases are also in that range, totalling C$200 billon, and at its last meeting, it expanded its program to include provincial and high-grade corporate bonds.
Loonie on the backfoot
The combined stimulus should be sufficient to kick start the economy as the lockdown is relaxed. However, the possibility of further monetary easing is weighing on the Canadian dollar, which apart from the virus impact, is reeling from the collapse in oil prices. The latest oil shock has worsened Canada’s economic woes, as the commodity is a major export of the country, and capped the loonie’s recovery versus the US dollar at C$1.3850.
The loonie has now slid back to around the C$1.41 level and could come under further pressure if the employment data is worse than expected. The government’s emergency response benefit program had received nearly six million applicants by April 13 so there’s a strong risk the jobless numbers will overshoot the forecasts. In such an event, the loonie could depreciate towards its April low of C$1.4264, and breaching that, to the C$1.45 level, as weak economic figures would leave the door wide open for more BoC action.
Negative rate talk blown out of proportion?
Incoming BoC Governor, Tiff Macklem, who takes over from Stephen Poloz in June, may have added to the loonie’s headaches after he raised the prospect of negative interest rates – something that the BoC had previously dismissed – in his first remarks following his appointment on May 1. However, his comments were likely taken out of context and the currency could be due a correction should markets realise that negative rates are not on the cards.
That, along with a possible uptick in the economic outlook, could help the loonie break resistance around C$1.3850 and settle in the C$1.38 region in the short-to-medium term.
