GBP/CAD testing late 2021’s lowsAs CAD rallies with labour marketData viewed as green light to BoC

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The Canadian Dollar pushed Sterling back to its late December low on Friday after February employment figures trounced all market expectations in an outcome that could potentially encourage the Bank of Canada (BoC) to feel more comfortable lifting its interest rate in the months ahead.

Statistics Canada said the economy added or otherwise recovered from the coronavirus some 337k jobs in February, which was almost three times a market consensus that had looked for a roughly 132k increase.

That was enough to push the overall unemployment rate down by a full percentage point to 5.5% when economists had expected on average that it would decline to only 6.2%, while some of the strongest gains were seen across the accommodation and food services sectors.

In addition, wage packets grew by 3.1% last month in what was a strong outcome compared with both pre and post-pandemic history, albeit one that is lower than January’s 5.1% annual inflation rate.

“Even though the Bank gets to see one more jobs report before its next meeting, there is more than enough justification from today's data for another hike in April. Indeed we expect a series of four straight interest rate hikes (including the one already delivered) before a pause as the Bank assesses the impact of those on the economy,” says Andrew Grantham, an economist at CIBC Capital Markets.

Above: Pound to Canadian Dollar rate shown at 15-minute intervals alongside USD/CAD.

Reference rates at publication:

GBP to CAD spot: 1.6634High street bank rates (indicative): 1.6052 - 1.6168Payment specialist rates (indicative: 1.6484 - 1.6550Find out about specialist rates and service, hereSet up an exchange rate alert, hereThe Pound to Canadian Dollar exchange rate was pulled lower by a falling USD/CAD exchange rate in the immediate market response to the data, which has been seen in some parts as a green light for the BoC to continue with the “series” of interest rate rises it recently suggested is likely ahead.

Governor Tiff Macklem told the CFA Society of Toronto last week that the BoC is likely to lift its cash rate in a “deliberate and careful way, being mindful of the impacts and monitoring the effects carefully,” over the coming months.

“The message that is emerging from central banks is that the exit from monetary policy stimulus will progress this year to tackle the growing inflationary threat,” says Jane Foley, head of FX strategy at Rabobank.

Governor Macklem’s address came closely behind a BoC decision to lift its interest rate from 0.25% to 0.50%, marking the first increase since the benchmark for borrowing costs was cut from 1.75% back in March 2020.

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“We're always a little wary of leaning too heavily on the past; the economic context is always changing, and anyone looking for a reason to discard past experience needs only to note that inflation is substantially higher than it was through any of those periods,” says Andrew Kelvin, chief Canada strategist at TD Securities.

“At the same time, we're comforted by the fact that the market hasn't significantly underestimated the amount of tightening in recent decades, given that the initial pricing in the market (160 bps in cumulative tightening over 3 years) roughly lines up with our forecast for 175 bps of total rate hikes (including the March move),” Kelvin wrote in a Thursday research briefing.

Prices in overnight-indexed-swap markets have continued to imply that investors and traders see a high probability of multiple further increases in the benchmark for borrowing costs, with the implied rate for December 2022 sitting at 1.86% on Thursday this week.

That could yet turn out to be too high as an assumption although Friday’s jobs data did little to discourage the notion and has instead left GBP/CAD under pressure near its December 2021 low after strategists at Scotiabank warned earlier in the week that any dip beneath 1.6650 would effectively mark the end of Sterling’s attempted recovery from those depths.

Above: Pound to Canadian Dollar rate shown at daily intervals.