CAD: Strong labour market report amid tariff turmoil – Commerzbank

Amidst all the upheaval caused by the US's announcement of 35% tariffs on Canadian goods at the end of last week, Friday's Canadian labour market report for June came as a very welcome surprise: 83,000 new jobs were created and the unemployment rate fell by 0.2 percentage points, despite the participation rate rising slightly. The only downside was that most of the job growth was in part-time positions. However, the Bank of Canada (BoC) is likely to overlook this, given that labour market reports have been very weak over the last few months, Commerzbank's FX analyst Michael Pfister notes.

Risk of a medium-to-long term negative impact on Canada increases

"A cut in September or October is now more likely, should the BoC conclude by then that the Canadian real economy needs more stimulus. This will depend on domestic growth and inflation in the coming months. Much will also depend on the further actions of the US administration and whether these higher tariffs will actually come into force on 1 August. As a reminder, at its April meeting, the BoC refrained from making its usual forecasts and instead outlined two scenarios. One assumes that the tariffs will cause short-term uncertainty but will not last too long. The other scenario is more pessimistic, with the tariffs remaining in place for a prolonged period and putting significant pressure on the Canadian real economy."

"In recent months, some leading indicators had recovered somewhat from record lows, raising hopes that the optimistic scenario would prevail. This is likely to be one of the reasons why the labour market picked up again in June. However, following Trump's latest announcement, the risk that the tariffs will have a negative impact on Canada in the medium to long term has increased significantly."

"Although Peter Navarro, one of Trump's key trade advisors, confirmed in a late-Friday-evening interview that goods compliant with the USMCA will continue to be exempt from higher tariffs, he also reiterated that negotiations with Canada are much more difficult than those with Mexico. Trump appears to favour the Mexican president, despite the fact that Mexico only secured tariffs that are 5 percentage points lower than Canada's over the weekend. Nevertheless, given the difficult negotiations, there are fears that this may not be the end of the story for Canada."