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USDCAD: Trading the Change in Canadian Employment

USDCAD: Trading the Change in Canadian Employment

2010-07-08 18:15:00
David Song, Currency Strategist
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Trading the News: Canada Net Change in Employment

Why Is This Event Important:


However, tightening credit conditions paired with the drop in household spending may lead firms to keep a lid on employment, and the central bank may adopt a wait-and-see approach over the medium-term as policy makers aim to balance the downside risks for the region. 

What’s Expected:
Time of release:        07/09/2010 11:00 GMT, 7:00 EST
Primary Pair Impact :    USDCAD
Expected:         20.0K
Previous:         24.7K

Will This Be Market Moving (Scenarios):

Employment in Canada is forecasted to increase another 20.0K in June following the 24.7K expansion in the previous month, while the jobless rate is projected to hold steady at 8.1% after falling back from 8.2% in March, and conditions are likely to improve going forward as the rebound in economic activity gathers pace. As a result, the Bank of Canada may see scope to normalize policy further this year after lifting the benchmark interest from the record-low, and Governor Mark Carney may look to raise his economic assessment over the coming months as growth prospects improve.

The Upside

As the BoC sees “robust” growth in the Canadian economy, with businesses benefitting from the marked expansion in the emerging economies, firms may look to increase production and employment throughout the second-half of the year following the rebound in global trade. At the same time, the ongoing improvement in the labor market could lead the central bank to withdraw monetary stimulus further in the second-half of the year, which could push the USD/CAD lower in the coming days as short-term rally fails to retrace the decline from the May high (1.0851).

The Downside

A report by Statistics Canada showed retail spending tumbled 2.0% in April to mark the biggest decline since December 2008, while the economy failed to grow during the same period, and the weakness in the private sector may lead businesses to curb their willingness to expand their labor force as policy makers maintain a cautious outlook for the world economy. As a result, BoC Governor Carney stated future rate hikes are not “preordained” as the instability in the global financial system clouds the prospects for future growth, and a dismal employment report is likely to weigh on the Canadian dollar as investors scale back expectations for a rate hike.

How To Trade This Event Risk 

Trading the given event risk favors a bullish outlook for the commodity currency as market participants expect employment to push higher for the sixth month in June, and price action following the release could set the stage for a long Canadian dollar trade as growth prospects improve. Therefore, if payrolls increase 20.0K or greater from the previous month, we will need to see a red, five-minute candle following the data to generate 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, and this risk will establish our first target. The second objective will be based on discretion, and we will move 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 pullback in private spending paired with the cautious outlook held by the central bank may lead businesses to keep a lid on employment, and a dismal labor report is likely to drag on the exchange rate as investors weigh the outlook for future growth. As a result, if payrolls rise less than 10.0K from the previous or unexpectedly contract in June, we will favor a bearish outlook for the Canadian currency, and will implement the same strategy for a long dollar-loonie trade as the short position laid out above, just in reverse.

TTN 10-07-08_5

Impact that the Canada Net Change in Employment has had on CAD during the last month

 TTN 10-07-08_3

May 2010 Canada Net Change in Employment

Employment in Canada increased for the fifth consecutive month in May, with payrolls expanding 24.7K from the previous month to top forecasts for a 15.0K rise, while the jobless rate unexpectedly held steady at 8.1%. The breakdown of the report showed full-time positions jumped 67.3K after expanding 43.8K in the previous month, while part-time jobs slumped 42.5K after surging 64.8K in April. As growth prospects improve, the Bank of Canada may see increased scope to normalize policy further in the second-half of the year as it lifts the benchmark interest off the record-low of 0.50%, and the central bank may raise its economic assessment over the coming months as the recovery gathers pace. However, the uncertainties surrounding the outlook for world growth paired with the instability in the global financial system could lead the BoC to adopt a wait-and-see approach as it aims to balance the downside risks for the region. TTN 10-07-08_4

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
00001_CAD 00002_CAD

Questions? Comments? Join us in the DailyFX Forum

To discuss this report contact David Song, Currency Analyst: instructor@dailyfx.com

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