On Aug. 9, foreign exchange analysts at Barclays said the near-term outlook for the Canadian dollar is "biased to the downside."

 

 

 

Barclays said in its weekly currency strategy briefing that two consecutive disappointing labor market data from Canada may prompt the Bank of Canada to slow the pace of interest rate hikes, while continued declines in oil prices may also put pressure on.

 

Official data last week showed Canada's employment fell for a second straight month in July, falling by 306,000, missing consensus expectations for a rise of 15,000.

 

Still, Canada's unemployment rate remains near a long-term low of 4.9 per cent, and wage growth remains strong at 5.4 per cent year-over-year.

 

As a result, Barclays economists have seen mixed signals from the report: While employment across industries fell more sharply in July than in June, the drop in the employment participation rate suggests that labor is undersupplied. Probably played a big role (rather than sheer demand weakness).

 

Ultimately for the Canadian dollar, what matters is how the jobs report affects the Bank of Canada's policy; specifically, how many further rate hikes they intend to make.

 

Barclays currency strategists said the drop in the labor force participation rate and strong wage growth suggested the labor market remained "tight" despite signs of cooling.

 

A tight labor market is when employers advertise jobs without enough labor, leading to upward pressure on wages and, ultimately, inflation. As such, it is a key determinant of whether a central bank sees a need to raise rates.

 

Barclays said: "As a result, we continue to believe that the Bank of Canada will moderate the pace of rate hikes, from 100 basis points in July, to 75 basis points in September, 50 basis points in October, and end at 3.75%. this cycle."

 

However, strategists do believe that if tighter financial conditions hit domestic growth and inflation in Canada more than expected, the Bank of Canada could end the cycle sooner and ultimately lower interest rates.

 

Such an outcome could disappoint market expectations, weighing on the Canadian dollar in the process.

 

As a result, the Canadian dollar is likely to remain under some pressure this week, according to FX strategists at Barclays. Moreover, they added that the continued decline in oil prices could add to this downward pressure.