Canada’s labour market weakened in February. Employment fell by 84,000 after a 25,000 drop in January.
The unemployment rate rose to 6.7% from 6.5% in January. Labour force participation fell again, reaching its lowest level outside the pandemic since 1997.
Monthly job figures were described as volatile. Job growth was linked to slower population and labour force growth, tied to retirements and government limits on the share of non-permanent residents.
In January and February combined, Canada’s population rose by 12,500. This was below the 103,000 increase over the same months in 2025.
Despite the February rise, the unemployment rate was below the Q4 2025 average of 6.8%. Total hours worked fell 1.1% in February, leaving Q1 on average flat versus the prior quarter.
CUSMA exemptions were noted as part of a more stable trade setting. Domestic consumer spending trends and ongoing monetary and fiscal support were also cited as factors that may support hiring later on.
The February jobs report was weak on the surface, with employment falling and unemployment rising to 6.7%. However, we see this as noise caused by a significant slowdown in population growth compared to the rapid increases we saw throughout 2025. The market is likely to overreact to this headline weakness, creating opportunities for those looking at the bigger picture.
This weak data has pushed the market to price in more aggressive interest rate cuts from the Bank of Canada, with overnight index swaps now implying almost 75 basis points of easing by the end of 2026. We believe this is an overcorrection, given the underlying support from consumer spending and trade. Traders should consider positions that bet against such deep cuts, such as selling late-2026 Bankers’ Acceptance futures (BAX).
In response to this news, the Canadian dollar has dipped below 72 U.S. cents, a level not seen since the final quarter of 2025. This appears to be a temporary dip driven by sentiment rather than fundamentals. Buying call options on the CAD against the U.S. dollar for the coming months offers a defined-risk way to position for a rebound as the economic outlook clarifies.
The underlying strength of the Canadian consumer, evidenced by a surprise 0.5% jump in retail sales for January, contradicts the weak hiring numbers. This suggests that domestic demand remains solid and will support a recovery in hiring later this year. We would view any dips in the S&P/TSX 60 index as an opportunity to buy call options with expirations in the third quarter to look past the near-term volatility.
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