USD/CAD: Trading the Canadian Employment Report

Trading the News: Canada Net Change in Employment

Why Is This Event Important:

Employment conditions in Canada are expected to improve for the fifth consecutive month in May as the economic recovery gathers pace, and the rebound in the labor market could lead the central bank to normalize policy further in the second-half of the year as it aims to balance the risk for growth and inflation. However, as non-farm payrolls in the U.S. are expected to rise more than 500K during the same period, there could be a limited reaction to the Canadian data as investors weigh the outlook for the world’s largest economy.

What’s Expected:
Time of release:        06/04/2010 11:00 GMT, 7:00 EST
Primary Pair Impact :    USDCAD
Expected:         15.0K
Previous:         108.7K

Will This Be Market Moving (Scenarios):

The Canadian economy is expected to add another 15.0K jobs in May following the record 108.7K rise in the previous month, while the jobless rate is expected to fall back to 8.0% from 8.1% in April, which would be the lowest reading since February 2008. As the labor market improves, with the BoC seeing 2010 as the “turning point when private sector demand takes over from the public sector as the primary source of growth,” conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the real economy.

The Upside

As businesses raise their rate of production, with economic activity expanding at the fastest pace in a decade, there certainly is a great chance for a bigger-than-expected rise in employment following the record jump in April. As the recent economic developments reinforce an improved outlook for future growth, businesses may look to increase their labor force, which could lead the BoC to raise its assessment for the economy.

The Downside

However, as firms face rising input costs, with the U.S., Canada’s biggest trading partner, confronted with the risks for a protracted recovery, businesses may keep a lid on employment as the outlook for global trade remains clouded with uncertainties. As a result, a dismal labor report could lead Governor Carney to hold a cautious outlook for the region, and may lead the central bank to adopt a wait-and-see approach over the near-term as policy makers aim to stem the downside risks for the region.

How To Trade This Event Risk

A rise in Canadian employment is likely to reinforce an improved outlook for future growth, and price action following the release could set the stage long Canadian dollar trade as the recovery gathers pace. Therefore, if payrolls increase 15.0K or more from the previous month, we will need to see a red, five-minute candle subsequent to the data to generate a sell entry on two-lots of USD/CAD. Once these conditions are met, we will place the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to safeguard our profits.

In contrast, businesses may see less scope to expand their labor force as policy makers maintain a cautious outlook for the global economy, and a dismal employment report could weigh on the prospects for future growth as trade conditions remain unfavorable. As a result, if payrolls increase less than 5.0K or unexpectedly contract from the previous month, we will favor a bearish outlook for the Canadian dollar, and will follow the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.

Impact that the Canada Net Change in Employment has had on CAD during the last month

April 2010 Canada Net Change in Employment

Employment in Canada surged 108.7K in April to mark the biggest advance since recordkeeping began in 1976, which lowered the jobless rate to 8.1% from 8.2% in the previous month, and conditions are likely to improve going forward as the expansion in monetary and fiscal policy continues to feed through the economy. The breakdown of the report showed full-time employment increased 43.8K following a 14.2K contraction in March, with part-time positions increasing another 64.8K after expanding 32.2K in the previous month, while the participation rate advanced to 67.2% after holding at 67.0% for the last two-months. As growth prospects improve, the Bank of Canada is likely to show an increased willingness to normalize policy further in the second-half of the year, and speculation for a rate hike could support a near-term rally in the Canadian dollar as the central bank holds an enhanced outlook for the region.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:

Bullish Scenario: If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the USD against the Canadian Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on USDCAD ahead of the data release.

Bearish Scenario: If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the USD against the Canadian Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on USDCAD ahead of the data release.

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To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com