Canada’s month-on-month change in Employment Insurance beneficiaries fell to -1.9% in January.
This follows a 0.4% change in the previous period.
We are seeing a significant tightening in the Canadian labour market, as the number of people receiving Employment Insurance benefits fell by 1.9% in January. This reversal from the previous month’s increase suggests more Canadians are finding work. This unexpected strength should make us reconsider the timing of any potential Bank of Canada rate cuts.
This strong employment data puts the Bank of Canada in a difficult position, likely pushing any rate cuts further into the year. With the market having priced in cuts for the summer, derivatives tied to the overnight rate, like CORRA futures, could see selling pressure. We should anticipate yields on government bonds to rise in the coming weeks.
Adding to this pressure, recent data for February showed inflation ticked back up to 3.1%, moving away from the central bank’s target. This combination of a hot job market and stubborn inflation reinforces a “higher for longer” interest rate environment. This makes bearish interest rate positions, such as buying puts on bond ETFs, seem more attractive.
From our perspective in 2025, we saw the labor market show signs of cooling, which built the case for eventual monetary easing. However, this new 2026 data sharply contradicts that trend, suggesting the underlying economic momentum is much stronger than anticipated. The market will now have to unwind trades that were based on last year’s assumptions.
Given this, we see potential strength in the Canadian dollar, especially against currencies where the central bank is more dovish. We should look at buying call options on the CAD/USD pair with expirations in the second quarter. Historically, a strong domestic economy combined with a hawkish central bank has been a primary driver for currency appreciation.
This positive economic signal is also supportive of Canadian equities, particularly in consumer-focused sectors. We might consider buying call options on the S&P/TSX 60 index as a broad play on a resilient domestic economy. The data suggests corporate earnings could surprise to the upside in the first half of the year.
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