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While the US nonfarm payrolls has historically been considered the top market moving economic indicator for the Forex market, its Canadian counterpart has generated far greater price action over the past three months. Currency traders have responded to the fundamentals with wild abandon as the releases associated with the previous three employment figures have printed at multiples of their respective forecasts. Looking ahead to the February numbers, the market’s response may not be quite as fitful as the moves we saw following the release of the December figures in January.

Trading the News: Canadian Net Change In Employment

What’s Expected

Time of release:                  03/07/2008 12:00 GMT, 07:00 EST

Primary Pair Impact :          USDCAD

Expected:                              3.0K

Previous:                               46.4K

Impact the Canadian employment data had on USDCAD over the last 3 months

January 2008 Canadian Net Change In Employment

USD/CAD returned to parity as the Canadian labor markets bounced back in a big way in January, with the net employment change surging a greater-than-expected 46,400. Meanwhile, the unemployment rate surprisingly fell to a 33-year low of 5.8 percent. The January Ivey PMI reading suggested a solid improvement in these labor market figures, and it appears that despite a sharp slowdown in business and trade activity at the end of 2007, conditions improved in early 2008 as domestic demand remains robust. Furthermore, the news indicated that the Canadian economy may be better equipped than previously expected to weather a massive slowdown – or worse, a recession – in the US. Unfortunately we had not traded this release since the first 5 minute candle was not red.

December 2007 Canadian Net Change In Employment

December’s labor market data was extremely surprising, as the net employment change unexpectedly fell by 18,700 against forecasts for a gain of 15,000. The manufacturing sector was responsible for most of the declines, as a slump in export demand leads producers to cut back on output and jobs. Furthermore, the news underpinned concerns that the Canadian economy is not immune for a slowdown in the US, and lent credence to the Bank of Canada’s decision to cut rates in December. Unfortunately we had not traded this release, though our trade setup for a dour reading and even a conservative discretionary approach to the data would have been quite profitable.

 November 2007 Canadian Net Change In Employment

Once again, the November labor force data from Statistics Canada was providing a fundamental booster for growth forecasts and the loonie. The official consensus for economists’ forecasts was looking for a modest 8,000-person improvement to nationwide payrolls. Crossing the wires more than five times what the market had expected, the 42,600-person jump easily reflected sustained demand for service sector and full-time jobs. At the same time, the change in labor force gauge accelerated for the forth consecutive month, leading the unemployment rate to tick higher from its recent record low – though this was expected. Though we didn’t trade this event risk, the immediate reaction left little room for follow through with parity as support just below.

How To Trade This Event Risk

While the US nonfarm payrolls has historically been considered the top market moving economic indicator for the Forex market, its Canadian counterpart has generated far greater price action over the past three months. Currency traders have responded to the fundamentals with wild abandon as the releases associated with the previous three employment figures have printed at multiples of their respective forecasts. Looking ahead to the February numbers, the market’s response may not be quite as fitful as the moves we saw following the release of the December figures in January. The key difference is the surprise factor: though the net employment change rarely meets economists’ estimates, an unexpected negative reading creates significant volatility. Though all of the components for a surprise employment release and large response from price action are once again in place for Friday’s release, we are unlikely to see a repeat of January. The most recent Ivey PMI report, which was significantly better-than-expected, showed that employment conditions improved and this has worked well as a leading indicator in the past . The official consensus is looking for 3,000-person increase in net payrolls, which sounds reasonable given the Ivey PMI employment numbers. Therefore, a short USDCAD trade on a stronger than expected labor report could provide a profitable trade. Before we even consider taking a trade on this event risk, we need to make sure that the unemployment rate does not tick higher to 5.9 percent from 5.8 percent, as this may eliminate the follow-through potential of a healthy net employment change. Should this conditional be met, we will look for a red, five minute bar for confirmation on a short of two lots of USDCAD at market. We will monitor this trade and all nearby support levels to see if the necessary follow through will be found. An initial stop will be set at the swing high (or reasonable distance) and our first target will equal this risk. Our second target will be based on discretion; and to preserve profit, we will move the stop on the second lot to breakeven when the first hits its target.

In the case that the data proves to be disappointing once again – or worse, posts a negative read – we will use the same strategy for a long trade as we recommended for the short, just in reverse.