FX Week Ahead - Top 5 Events: July Canada Jobs Report & USD/CAD Rate Forecast
Canada Jobs Report Overview:
- The July Canada jobs report is due out on Friday, August 9 at 12:30 GMT, and the data are expected to show another solid pickup in the labor market.
- USDCAD prices have recovered in recent weeks as global risk appetite and crude oil prices have taken a beating.
- Retail traders have remained net-short since July 23 when USDCAD traded near 1.3135; price has moved 0.5% higher since then.
Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.
08/09 FRIDAY | 12:30 GMT | CAD Gross Domestic Product (JUL)
Amidst a deteriorating backdrop for global risk appetite, the commodity currencies have come under significant pressure in recent weeks. With the US-China trade at the forefront of market participants’ minds, oil prices have fallen back, weighing on the Canadian Dollar. If the world’s two largest economies remain on a collision course, it’s likely that the commodity currencies trade in synchrony.
As such, the July Canada jobs report due out on Friday is unlikely to have a significant impact on Bank of Canada interest rate expectations, and thus, the Canadian Dollar. But for the otherwise softening global growth backdrop, there may not be much of a case for the BOC to follow the Federal Reserve or Reserve Banks of Australia and New Zealand in cutting rates.
The Canadian labor market is looking for a rebound in July after a soft June. Bloomberg News consensus forecasts call for the July Canada jobs report to show that the economy added 15K jobs after losing -2.2K in May. Nevertheless, 2019 has been a good year for the Canadian jobs market, averaging 41.3K jobs added per month as the unemployment rate has come down to 5.5%, where it due to stay on hold.
Bank of Canada Interest Rate Expectations (August 2, 2019) (Table 1)
The fact of the matter is that the resilient Canadian labor market is giving the BOC to keep rates on hold for the foreseeable future. The September BOC meeting only has a 10% chance of a 25-bps rate cut, according to overnight index swaps. There is a coin flip’s chance of a rate cut by the end of the year, and a 60% chance of a 25-bps rate cut by January 2020.
USDCAD Technical Analysis: Daily Timeframe (July 2018 to August 2019) (Chart 1)
The synchronous selloff in the commodity currencies has provoked USDCAD to break its downtrend from the May and June swing highs. Bullish momentum has certainly perked up in recent days, with price comfortably above the daily 8-, 13-, and 21-EMA envelope. Slow Stochastics are in overbought territory while daily MACD is just making its way through the signal line with a bullish crossover.
Nevertheless, the bullish piercing candle around the July Fed meeting has seen little meaningful follow through, insofar as both the August 1 and 2 daily candles produced shooting stars/inverted hammers in the March 20/June 7 swing low area around 1.3238/51. Among the commodity currencies, given that the BOC is less likely than either the Reserve Bank of Australia or the Reserve Bank of New Zealand to ease significantly in 2019, if there is a rebound in risk appetite, it’s likely that the Canadian Dollar will be a main beneficiary.
IG Client Sentiment Index: USDCAD Rate Forecast (August 2, 2019) (Chart 2)
USDCAD: Retail trader data shows 38.6% of traders are net-long with the ratio of traders short to long at 1.59 to 1. In fact, traders have remained net-short since July 23 when USDCAD traded near 1.3135; price has moved 0.5% higher since then. The number of traders net-long is 9.3% lower than yesterday and 36.0% lower from last week, while the number of traders net-short is 5.8% lower than yesterday and 11.4% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests USDCAD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDCAD-bullish contrarian trading bias.
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher, email him at firstname.lastname@example.org
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