Economists play down BoC rate hike risks as Canadian dollar jumps after surprisingly strong jobs data

The ​Canadian dollar ​strengthened ‌to an eight-week high against the greenback on Friday after the release of stronger-than-expected domestic jobs data and a U.S. labour report that, by contrast, missed forecasts.

The loonie was trading ⁠0.6% ​higher at 1.3935 per U.S. dollar, or 71.76 U.S. cents, its strongest intraday level since June 11. The U.S. dollar index, which pits the greenback against several global currencies, was down nearly half a percent to 99.47, reflecting the weak U.S. payrolls data.

Despite the Canadian jobs beat, money markets aren’t convinced it will necessarily translate into a rate hike anytime soon.

Prior to this morning’s jobs reports, implied interest rate probabilities in money markets suggested better than 50% odds that the Bank of Canada would hike its trend-setting interest rate by a quarter percentage point by the end of this year. They held steady following the reports, with about 17 basis points of a rate hike priced into markets by December.

Economists are also downplaying the risks that today’s report will mean tighter monetary policy.

“The surge in employment in July following last week’s strong preliminary second-quarter GDP growth estimate is further evidence that the economy is gaining momentum after a weak start to the year,” Ariane Curtis, senior North America economist with Capital Economics, said in a note.

“While the Bank of Canada is likely to sound more hawkish following the fall in the unemployment rate, they are unlikely to rush into tightening policy given the ongoing softness of wage growth core inflation. Indeed, for now we are sticking to our view that the Bank will remain on hold this year.”

Douglas Porter, BMO Capital Markets’ chief economist, had a similar view on how Canada’s central bank will react.

“Landing on day of a soft U.S. payroll result, the contrast with Canada’s surprisingly upbeat reading is stark. Not unlike the GDP bounce from weakness at the turn in the year, the job figures are very much echoing the rebound. But, perhaps also like the GDP results, the recent job growth likely exaggerates the underlying strength in the economy,” Porter said.

Still, “the big July gains are a hint of building momentum after the Q2 rebound, even as trade uncertainty still looms over the outlook. With wage growth taming further and energy prices more moderate, the BoC won’t take on a more hawkish tone yet, though a strengthening economic backdrop will could eventually push them in that direction if it persists.”

Andrew Hencic, director and senior economist with TD Economics, also expects no sudden moves by the Bank of Canada.

“The labour market is showing clear signs of recovery, but the 6.4% unemployment rate continues to signal an economy operating with some slack. Together with the prospect of new tariffs coming into effect on August 19th, the downside risks to the economy remain. We continue to expect the unemployment rate to gradually decline in the coming months as the economy deals with the volatility in energy prices and potentially more trade headwinds. Given this backdrop we expect the Bank of Canada to stay on hold for the rest of the year,” Hencic said.

David Rosenberg, economist and founder of Rosenberg Research, said “there is no smoking gun here for the BoC to shift back to a hawkish stance because all of this did not one iota coincide with any wage inflation. In fact, the YoY wage trend actually softened to +3.0% from +3.7%, and this was another miss in the consensus forecast, which was +3.4%.”

“Amazingly, this is the weakest labor cost pace since February 2022 and nowhere near the near +5.5% pace during that mini-inflation cycle in 2021-2022. This is a telltale sign that even with the decline in the headline unemployment rate, the non-inflationary estimate (NAIRU) is likely quite a bit lower than 6.4%. There is no other way to explain a lower official jobless rate and a wage trend cooling off this rapidly. This is a key reason why the BoC has no reason to look at this report as anything resembling an inflationary threat,” added Rosenberg.

Andrew Grantham, senior economist with CIBC, and Ali Jaffery, chief economist with KPMG Canada, both issued notes saying they expect the Bank of Canada to remain on hold this year and into the start of 2027.

And Matthieu Arseneau and Alexandra Ducharme, economists with National Bank, provided several reasons why the BoC should not rush to raise interest rates. “First, the labour market remained artificially buoyed by temporary factors, namely the census and a tourism boom in the wake of the FIFA World Cup. Furthermore, uncertainty has intensified in recent weeks regarding trade tensions. First, the first joint review of USMCA, scheduled for July 1, did not result in an agreement to extend the deal for another 16 years. Worse still, the White House is now threatening to impose tariffs that would violate the commitments set forth in the free trade agreement. In this context, it would be premature to tighten monetary policy in the short term.”

Statistics Canada said employment had jumped by 75,100 positions in July on strong gains in both the full-time and part-time sectors. The jobless rate fell for the third consecutive month, dipping from 6.5 per cent to 6.4 per cent, a level last seen in July, 2024. Analysts polled by Reuters had forecast a net gain of 16,500 positions and estimated the jobless rate would remain at 6.5 per cent.

The U.S. employment report contrasted sharply. U.S. employers unexpectedly cut 23,000 jobs last month, and Labor Department revisions shaved 103,000 jobs off payrolls in May and June. But the unemployment rate dipped to 4.1 per cent as Americans left the job market.

Canadian bond yields rose across a flatter curve following the jobs data. ​The 2-year was up 2.3 basis points at 2.951%, while the gap between it and the U.S. equivalent narrowed by 8.3 basis points to about 123 ​basis points in favour of the U.S. note. U.S. Treasury yields fell after the weaker-than-expected U.S. jobs report, particularly at the shorter end of the curve, reflecting decreased bets that the U.S. Federal Reserve will hike interest rates this year. Markets are now pricing in less than a 50% chance that the Fed will hike rates at its next policy meeting.

With files from Reuters