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USD/CAD: Trading the Change in Canadian Employment

By , Currency Analyst
09 September 2010 18:50 GMT

Trading the News: Canada Employment

Why Is This Event Important:

The data could spark a bullish reaction in the loonie as growth prospects improve, and the release could pave the way for a tradable event as investors weigh the outlook for monetary policy. Earlier this week, the Bank of Canada increased its benchmark interest rate by 25bp to 1.00%, and a rise in employment could lead the central bank to raise borrowing costs further over the coming months as the recovery gathers pace.

What’s Expected:

Time of release:09/10/2010 11:00 GMT, 7:00 EST

Primary Pair Impact :USDCAD

Expected: 30.0K

Previous: -9.3K

Will This Be Market Moving (Scenarios):

Employment in Canada is forecasted to increase 30.0K following the unexpected 9.3K contraction in July, while the jobless rate is projected to hold steady at an annualized 8.0% for the second month. Beyond the headline reading, we will also need to take a look at the rate of change in full and part time positions in order to gauge the impact of the results. A faster pace of growth in full-time employment would suggest businesses are taking a more pronounced approach to increase production, while an increase in part-time positions could be influenced by seasonal effects such as back-to-school spending.

The Upside

Business spending in Canada expanded at the fastest pace since June 2008, which was reflected in the Ivey PMI report for August as the index jumped to 65.9 from 54.0 in the previous month. The data suggest firms are increasing production and employment at a faster pace in the third-quarter as policy makers expect the economic recovery to gather pace going forward.

The Downside

However, the slowdown in global trade paired with the weakness in the domestic economy could lead firms to keep a lid on employment throughout the remainder of the year. Businesses may look to protect their bottom-line and scale back on their labor force as the economic outlook remains clouded with uncertainties.

How To Trade This Event Risk

Expectations for a rise in employment favors a bullish outlook for the Canadian dollar, and price action following the release could set the stage for a long loonie trade as growth prospects improve. Therefore, if payrolls increase 30.0K or greater from the previous month, we will need a red, five-minute candle subsequent to the data to establish a sell entry on two-lots of USD/CAD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into. That risk will then generate our first objective, while the second target will be based on discretion. We will also look to move the stop on the second lot to breakeven once the first trade reach its mark in an effort to lock-in our profits.

In contrast, businesses may scale back on employment as they face higher borrowing costs paired with the slower pace of growth in household spending. As a result, if payrolls expand less than 10.0K or unexpectedly contract in August, we will favor a bearish outlook for the Canadian currency. If we get a dismal labor report, we will utilize the same strategy for a long dollar-loonie trade as the short position laid out above, just in reverse.

Potential Price Targets For The Release

USDCAD_Trading_the_Change_in_Canadian_Employment_body_ScreenShot004.png, USD/CAD: Trading the Change in Canadian Employment

Impact Canada Employment has had on CAD during the previous month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

Jul 2010

08/06/2010 11:00 GMT

12.5K

-9.3K

+27

+89

July 2010 Canada Employment

The labor market in Canada unexpectedly weakened in July, with employment contracting 9.3K amid forecasts for a 12.5K rise, while the jobless rate increased to 8.0% from 7.9% in June. The breakdown of the report showed full-time positions slumped 139.0K after rising 48.9 in the previous month, while part-time employment advanced 129.7K during the same period after climbing 44.2K in June. The data suggests that the recovery is losing pace as businesses keep a lid on production and employment, which could lead the Bank of Canada to support the economy throughout the remainder of the year as it aims to stem the downside risks for the region. However, market participants expect the central bank to normalize monetary policy further as the region benefits from the rise in global trade, and speculation for another rate hike in September could drive the exchange rate higher over the near-term.

USDCAD_Trading_the_Change_in_Canadian_Employment_body_ScreenShot003.png, USD/CAD: Trading the Change in Canadian Employment

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.

USDCAD_Trading_the_Change_in_Canadian_Employment_body_00001_CAD.jpg, USD/CAD: Trading the Change in Canadian EmploymentUSDCAD_Trading_the_Change_in_Canadian_Employment_body_00002_CAD.jpg, USD/CAD: Trading the Change in Canadian Employment

Questions? Comments? Join us in the DailyFX Forum

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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09 September 2010 18:50 GMT