Will USDCAD Threaten the Bullish Trend on Canada Employment?

Trading the News: Canada Net Change in Employment

The Canadian economy is expected to add 10.0K jobs in July and a strong rebound in employment should prop up the loonie as it raises the outlook for growth.

What’s Expected:

Time of release: 08/09/2013 12:30 GMT, 8:30 EDT

Primary Pair Impact: USDCAD

Expected: 10.0K

Previous: -0.4K

DailyFX Forecast: -5.0K to 15.0K

Why Is This Event Important:

Although the Bank of Canada (BoC) softened its tone for a rate hike, a marked improvement in the labor market may encourage Governor Stephen Poloz to adopt a more hawkish tone for monetary policy, and a shift in central bank rhetoric may heighten the appeal of the Canadian dollar as market participants weigh the outlook for monetary policy.

The Upside/Bullish Scenario

The pickup in private sector consumption may prompt businesses to expand their labor force, and a pickup in job growth may spark a bullish reaction in the Canadian dollar should the data fuel speculation for higher borrowing costs.

The Downside/Bearish Scenario

On the other hand, the sharp slowdown in business spending may point to a further contraction in employment, and a dismal print may spur a near-term rally in the USDCAD as it raises the scope of seeing the BoC carry its wait-and-see approach into the following year.

How To Trade This Event Risk

Forecasts for a rebound in employment favors a bullish outlook for the loonie, and a marked pickup in job growth may set the stage for a long Canadian dollar trade as it fuels bets for higher borrowing costs. Therefore, if the economy adds 10.0K jobs or more in July, we will need to see a red, five-minute candle following the report to consider a sell entry on two-lots of USDCAD. Should these conditions warrant a short trade, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in order to preserve our profits.

In contrast, the ongoing weakness in the real economy along with the contraction in business spending may drag on hiring, and a dismal print may weaken the loonie as it dampens the scope for a rate hike. As a result, if the print falls short of market forecast, we will implement the same strategy for a long dollar-loonie trade as the short position laid out above, just in the opposite direction.

Potential Price Targets For The Release

The upward trending channel in the USDCAD looks poised to take shape over the remainder of the year as it breaks out of a long-term consolidation phase, but we may see the dollar-loonie threaten the bullish trend should the data spur a shift in the policy outlook. However, should the data continue to dampen the scope for higher borrowing costs, we should see the USDCAD continue to carve a series of higher highs paired with higher lows, and the loonie may continue to underperform against its U.S. counterpart as the BoC retains a rather neutral tone for monetary policy.

Impact that Canada’s Employment report has had on CAD during the last month

June 2013 Canada Net Change in Employment

Canadian employment slipped 0.4K in June following the 95.0K advance the month prior, while the jobless rate held steady at an annualized 7.1% for the second consecutive month. Despite the better-than-expected print, the Canadian dollar struggled to hold its ground following the data, with the USDCAD climbing above the 1.0550 figure, and the loonie held a weaker tone throughout the day as the pair closed at 1.0569.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

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