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- CAD shifts onto back foot after underwhelming labour data.

- Jobs are growing healthily, but not by enough for the market.

- Markets are unconvinced about BoC's interest rate guidance.

The Canadian Dollar handed back earlier gains and slipped lower Friday after official data showed the labour market cooling its heels in October, which did little to encourage markets to bet more confidently on a faster pace of interest rate rises from the Bank of Canada (BoC).

Canada's economy created 11,200 new jobs during October, down from a show-stopping 63,300 seen during September and beneath the market consensus for 12,700 new jobs.

The unemployment rate posted a surprise 10 basis point fall to 5.8% during the recent month when markets had anticipated it would remain at 5.9%.

However, and on the downside, this was not because of strength in the labour market. Statistics Canada says the unemployment rate fell simply because a lesser number of unemployed went out to look for work in October.

Average weekly earnings rose to $985.34 during October, up from $967.5 the previous year, which is an annual increase of almost 1.9%. However, there were no consensus forecasts for this number.

"Canada’s economy isn’t roaring ahead, but it still sits at what looks like full employment, as today’s data clearly underscored," says Avery Shenfeld, chief economist at CIBC Capital Markets. "The details were decent, with the gains coming in the private sector and a leaning to full time."

Markets care about the labour market data because falling unemployment and improving job creation, according to conventional thinking on the subject, put upward pressure on wages.

Pay growth leads to increased demand within an economy and exerts upward pressure on inflation, with implications for interest rates and financial markets.

Changes in interest rates are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

"Average earnings for permanent employees are now up a lean 1.9% year on year according to this series. That’s probably a low-ball figure, but its part of a suite of data that certainly don’t show any evidence of wage pressures yet. On balance, this isn’t the kind of data the BoC will need to advance a rate hike into December, but there’s still another jobs report due before that decision date," Shenfeld adds.

The USD/CAD rate was quoted 0.09% higher at 1.3105 following the report, after reversing and earlier loss, denoting a stronger U.S. Dollar and weakening Canadian Dollar. It is up 3.8% for 2018.

The Pound-to-Canadian-Dollar rate was 0.02% higher at 1.7024 after reversing an earlier 0.07% loss. It has risen 0.50% this year.

The Bank of Canada raised its interest rate by 25 basis points to 1.75% in October and said it will go on lifting its benchmark rate over coming quarters, potentially taking the cash rate up to 3.5%.

Moreover, the BoC also dropped some key language that has typically featured in all of its monetary policy statements, which had suggested that any future interest rate rises would only come at a "gradual" pace.

The message coming from the latest policy update was unambiguous and made clear that the BoC is gearing up to raise rates in what could be quite an agressive manner over the next year or more.

Yet beyond an initial knee-jerk bounce higher in the Canadian Dollar, the Loonie has hardly benefitted from this clarity.

The USD/CAD rate has fallen less than 1% since the BoC's October announcement, while the Pound-to-Canadian-Dollar rate has risen 1.3% and the EUR/CAD rate has risen too.

The signal given off by interest rate derivatives markets about the likely pace of future BoC rate rises has not changed meaningfully either.

"Risks skew to higher rates, markets will largely ignore downside surprises while an upside surprise will reinforce recent positive sentiment around the Canadian economy," says TD's McCormick, of Friday's labour report.

The market-implied Canadian cash rate for Wednesday 09, January was 2% this Friday morning. Pricing in the same market also suggests traders are not expecting another hike after that until July 2019.

The implied cash rate finishes next year at 2.25%, which suggests markets do not currently see the BoC moving any faster in 2019 than it has done in 2018.

As a result, there is scope for the Canadian Dollar to rise if economic data over coming weeks can convince financial markets that the BoC to be making the case for a faster and steeper pace of interest rate rises.

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