3 Scenarios For The CAD Employment Change Report

Posted by Erica Brooks

Employment Change as Key Indicators for Economic Growth

The Bank of Canada is one of the central banks considering when would be the appropriate time to continue raising interest rates. The BOC next meets in mid-July and markets want to now if a rate hike is more likely in the meeting after that in August, or if the central bank waits till the meeting after that in October. Prior to two weeks ago, the consensus had shifted towards the latter date, and we saw the USD/CAD drifting higher.

The Employment Change report, set to be released at 7AM ET, can help give us some further insight into what the BOC may say in its next meeting. The consensus forecast is for the economy to have added 13.8K jobs in June, following increases of 58.3K in April and 22.3K jobs in May.

That is a decent pace of job creation but as we can see, May was weaker than April, and June is expected to be weaker than May. Let’s look at employment data going back a few years for better context.

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 69.2K 15.1K -1.5K 58.3K 22.3K 2010 43.0K 20.9K 17.9K 108.7K 24.7K 93.2K -9.3K 35.8K -6.6K 3.0K 15.2K 22.0K 2009 -129.0K -82.6K -61.3K 35.9K -41.5K -7.4K -44.5K 27.1K 30.6K -43.2K 79.1K -2.6K 2008 46.4 43.3K 14.6K 19.2K 8.4K -5.0K -55.2K 15.2K 106.9K 9.5K -70.6K -34.4K 2007 89.0K 14.2K 54.9K -5.2K 9.3K 34.8K 11.3K 23.3K 51.1K 63.0K 42.6K -18.7K

The past 5 months have averaged 32K jobs gained, so June’s data is expected to show a level about 1/3 of that, and slower than the last 4 out of 5 months. In other words, the expectations for June’s jobs report is not that stellar.

Therefore if we have a stronger than expected release it can help build expectations that the Canadian economy picks up its pace of growth in the second half of the year.

If we look at the unemployment rate, we see it has been declining steadily since the end of the recession, and while still high, its decline is a positive sign for the Bank of Canada.

The expectations is that the unemployment rate remains at 7.4%. The rate fell from 7.6% in April to 7.4% in May.

Possible Scenarios:

While the spotlight will be on the Non-Farm Payroll report once we get into the meat of NY trading, the Canadian employment report is early enough that we can see some strong movement in the CAD pairs prior to the NFP release.

We are going to look for 3 scenarios:

Scenario 1 – Bullish Case for CAD: An employment reading that surprise to the upside, coming in close to 10K or more above the consensus forecast – a reading near May’s 22K – should give the CAD a boost as it would increase the outlook for the economy, at a time when inflation pressures mounted, and will put more data in front of the central bank calling for a rate hike that comes sooner rather than later. This type of reading can help the USD/CAD break through its recent lows at 0.9570, carving out fresh weekly lows for the pair. While 0.9540 can provide support, a positive CAD report (and let’s assume a strong enough NFP report to keep risk appetite going) can give the CAD momentum to push towards its lows from end of April near 0.9460.

Scenario 2 – Status Quo: The status quo case is growth of 10K to 15K, as this would imply that Canada’s job growth continues, but we have seen a slowdown in comparison to the previous 2 months. The central bank can remain in wait-and-see mode, or use other data to determine wether to be cautious or more aggressive in the July meeting. The pair may consolidate further around the 0.9580 area, and if risk aversion comes from a weaker NFP report, we could have the pair reverse part of its Thursday move in favor of the CAD.

Scenario 3 – Bearish Case for CAD: The third scenario is that job growth was weaker than expected in the month, and we have flat or negative job growth. Such a result would squarely put the BOC into a defensive posture, and could unwind some of the recent CAD gains. The move to the topside may be limited by strong resistance at the 0.9675 area, as that is an important level that turned from support to resistance, and is also our 50% retracement of the May-June rally. Any such move to that resistance could be a good play for a short entry, so it may be possible to take advantage of a poor report.

Some Observations About the Daily USD/CAD Chart

The Canadian Dollar has been a very strong performer over the last 2 weeks as it was boosted by last week’s Greece relief rally as well as red hot CPI data. The first half of this week we faced some consolidation of those CAD gains, before another strong move in favor of the CAD in Thursday’s global session – again on the back of risk appetite as a result of a better than expected US ADP jobs report.

In the daily chart, we see a few interesting signs. First, the market respected the 200-ema, which means we are keeping with the long-term trend. Our medium term moving averages 21-ema in read and 55-ema in blue have seen a bearish crossover this week, an indication that we should be considering short plays during this configuration of the MA’s. We managed to break through the 61.8% retracement of the full swing from 0.9440 to 0.9915, and have closed below that level again. We come to rest at the support level at 0.9580, our lows from last Friday, though we peeked below that in Thursday’s session.

With the currency pair set up at important level, we now await further direction, direction that can come from a positive or negative surprise from the employment data. The recent bearish alignment of the pair leaves more chance for a bigger reaction if we have a surprise reading to the upside, than the other way around.

We will also have to be cognizant of the cross currents flowing around an hour and a half after the Canadian employment report as e get the Non-Farm Payroll report.

Nick Nasad Chief Market Analyst FXTimes