USD/CAD: Trading the Change in Canadian Employment

Trading the News: Canada Net Change in Employment

Why Is This Event Important:

The Canadian labor market is expected to improve for the second consecutive month in September, and the data could lead the loonie to test parity against its U.S. counterpart as the economic recovery gathers pace. However, as U.S. non-farm payrolls are scheduled to cross the wires at 12:30 GMT, market reaction to the Canadian release could be short lived as investors weigh the prospects for the global recovery.

What’s Expected:

Time of release:10/08/2010 11:00 GMT, 7:00 EST

Primary Pair Impact :USDCAD

Expected: 10.0K

Previous: 35.8K

Will This Be Market Moving (Scenarios):

Employment in Canada is forecasted to increase 10.0K in September following the 35.8K expansion in the previous month, while the jobless rate is projected to hold steady at 8.1% for the second month. As the labor market improves, the economic development is likely to encourage an enhanced outlook for the region, which could push the USD/CAD towards parity as the exchange rate breaks below 1.0100 for the first time since August.

The Upside

Businesses spending in Canada increased the most since 2006, with the Ivey PMI advancing to 70.3 in September from 65.9 in the month prior, while the gauge for employment advanced to 58.5 from 55.3 in August. As the region benefits from the rebound in global trade, firms may look to expand their labor force going into 2011, and the BoC may see scope to normalize monetary policy further, which could lead the USD/CAD to retrace the advance from earlier this year.

The Downside

At the same time, a report by Statistics Canada showed economic activity contracted for the first time in 11 months as GDP slipped 0.1% in July, and the uncertainties surrounding the economic outlook could lead businesses to keep a lid on employment over the coming months. A dismal labor report could spark a rebound in the dollar-loonie, and the central bank may look to adopt a neutral policy stance for the remainder of the year as it aims to encourage a sustainable recovery.

How To Trade This Event Risk

Forecasts for a rise in employment clearly favors a bullish outlook for the Canadian dollar, and price action subsequent to the release could set the stage for a long loonie trade as the recovery gathers pace. Therefore, if the economy adds 10.0K or more jobs in September, we will need a red, five-minute candle following the data to confirm a sell entry on two-lots of USD/CAD. Once these conditions are met, we will set 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 objective. The second target will be based on discretion, and we will shift the stop on the second lot to breakeven once the first trade reaches its mark in an effort to lock-in our profits.

In contrast, the cautious tone held by the central bank paired with the slower pace of expansion in global trade could lead businesses to scale back on hiring, and a dismal labor report could spark a bearish reaction in the Canadian dollar as the outlook for future growth deteriorates. As a result, if employment unexpectedly contracts from August, we will implement to same strategy for a long dollar-loonie trade as the short position laid out above, just in reverse.

Potential Price Targets For The Release

Impact change in Canada Employment has had on CAD during the previous month

August 2010 Canada Net Change in Employment

Employment in Canada increased 35.8K in August, which exceeded forecasts for a 30.0K rise, while the jobless rate unexpectedly climbed to 8.1% from 8.0% in the previous month as discouraged workers returned to the labor force. The breakdown of the report showed demands for full-time employment increased 79.9K after contracting 139.0K in July, which was offset by a 44.1K decline in part-time positions, while an overall 25.6K drop in manufacturing positions led the decline. As the rebound in global trade tapers off, businesses may scale back on hiring over the coming months, and the central bank may adopt a wait-and-see approach for the remainder of the year as the recover appears to be slower than initially expected. After raising the benchmark interest rate to 1.00% in September, the Bank of Canada said further rate hikes will be “carefully considered” as the tepid recovery in the U.S., Canada’s biggest trading partner, continues to pose a risk for the economy, and the central bank may keep rates on hold going into 2011 as the outlook for future growth remains clouded with uncertainties.

What To Look For Before The Release

Traders with access to market depth information via the FXCM Active Trader Platformmay 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