Will A Worsening Employment Picture Sink The Loonie?

How To Trade This Event Risk

The Canadian labor market is expected to have continued its downward trend in June with job creation declining for the third time in four months. Economist are expecting a gain of 6,500 jobs in June down from 8,400 the month prior and a significant drop from the 40,000+ gains that were realized to start the year. Although , the Canadian economy posted grew in April it followed the first quarter of negative growth in five years, as the headwinds from the U.S. continue to weigh on export demand. Indeed, Ontario-the country’s biggest province- saw a 1.4% contraction as its’ biggest industries manufacturing and forestry declined. Although the recent Ivey PMI reading showed a rebound in the sector, its employment component declined to 58.2 from 59.36 the month prior.  However, the economy has continued to be supported by rising oil prices which has been a source of job creation for the country, which allowed the BoC to keep their benchmark rate unchanged at their last policy meeting. The central bank has turned an eye toward inflation as the headline reading rose to 2.2% in May. Crossing the wires after the employment report will be Canadian and U.S. trade reports which will provide further event risk. An expected increased in the U.S. deficit may provide dollar bearish sentiment.

The Canadian economy has continued to be supported by rising commodity prices which may see companies hold onto workers longer than expected. Additionally, domestic consumption has remain strong gaining 0.6% in April, further demonstrating the resiliency of the economy. Therefore we would look for rebound in employment, with job creation returning to double digits If we have this bullish fundamental mix, we will look for a red, five-minute candle to confirm entry on two lots of USDCAD at market. Our stop will be placed at the nearby swing low (or reasonable distance considering the level of surprise) and the first lot’s target will be immediately set equal to this initial risk. The second target will be determined by discretion. To preserve profit, we will move the stop on the second lot to breakeven when the first takes profit.

Alternatively, a second month of declining job growth or the first job loss since December 2007 will spark bearish loonie sentiment. For a short  we will look for a growth to remain flat or slightly improved and follow the same setup as the short, just in reverse.