CAD was the worst performer among majors, falling to its lowest level since August (CAD best performer against USD). Energy costs and robust job data fueled the Loonie’s recovery. Inflationary pressures have also fueled expectations about a rate hike by the Bank of Canada.
The price of energy was a primary driver of the loonie’s strength. As the energy crisis in China, Europe, and the United Kingdom intensified, crude oil prices rose. Last week, the front-month WTI and Brent crude oil futures rose 5% and +4.95 percent, respectively. Last week, the front-month WCS future contract, which is the benchmark for Canadian crude oil, climbed by +3.3 percent. The CAD rose as demand for Canada’s oil exports increased.
In September, the number of people employed in Canada increased by 157.1 thousand, exceeding expectations of 61.2 thousand and August’s 90.2 thousand. In August, the unemployment rate fell 0.2 percentage points to 6.9%, as expected, and continued to improve to 7.1 percent. This was in stark contrast to the disappointing US payroll statistics. In September, the US added only +194K nonfarm jobs, significantly less than the consensus of +500K. The August figure was revised up to a +366K rise. The unemployment rate, on the other hand, has dropped significantly from 5.2 percent in August to 4.8 percent now. The market was expecting a slight decline to 5.1 percent.
Core CPI increased by 3.5 percent year over year, up from +3.3 percent in July. Furthermore, the average of the central bank’s three favored measures rose by 2.6 percent year over year, the highest level since March 2009, indicating the broad-based character of the price increases. Inflation currently appears to be sticking around longer than expected. While supply problems are unlikely to be eased in the foreseeable future, the energy crisis is expected to intensify.
Solid employment and inflation have reignited talk of a rate hike by the Bank of Canada. Bond yields in Canada have risen throughout the curve, with the 10-year yield reaching its highest level since March. At the BOC’s October meeting, we estimate the BOC to cut its QE purchases to CAD 1 billion per week, with the first-rate hike coming in late 2022.
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