Last week, markets wondered whether the surprise in the US payrolls report could really be taken as an indication of a similar surprise in the Canadian labour market, Commerzbank’s FX analyst Michael Pfister notes.

Size of the next rate cut depends on Tuesday's inflation figures

“Although I thought a direct link was unlikely at the time, the Canadian labour market delivered a positive surprise on Friday: job growth was higher than expected (and, even more positively, was driven by full-time jobs) and the unemployment rate unexpectedly fell. At the same time, wage growth fell more than expected - another sign that inflationary pressures are likely to ease.”

“But will this be enough to dissuade the Bank of Canada (BoC) from a bigger 50bp cut next week? The market still seems to have its doubts, as interest rate expectations have barely corrected. And we also remain unconvinced. First of all, this was just one labour market report and we will have to see in the coming months whether the Canadian labour market is recovering in a sustainable way. Moreover, the participation rate fell in September, which may have partially distorted the decline in the unemployment rate.”

“More likely, the size of the next rate cut will depend more on tomorrow's inflation figures. Recently we have seen a sustained decline in inflation to the middle of the target range of 1-3%, and there are even fears that it will soon fall below the 2% midpoint. If this is the case tomorrow, there is a strong case for a larger rate cut of 50 basis points next week.”