FX - USD/CAD: Trading the Canada Employment Report

Trading the News: Canada Net Change in Employment

What’s Expected:

Time of release: 03/11/201112:00 GMT, 7:00 EST

Primary Pair Impact :USDCAD

Expected: 25.0K

Previous: 69.2K

DailyFX Forecast: 5.0K to 20.0K

Why Is This Event Important:

Employment in Canada is anticipated to increase another 25.0K in February following the 69.2K rise in the previous month, and the ongoing expansion in the labor market could spark a bullish reaction in the Canadian dollar as growth prospects improve. As private sector activity gathers pace, the Bank of Canada may see scope to tighten monetary policy further over the coming months, and the loonie may continue to outperform against its U.S. counterpart as growth in the region outpaces the recovery in the world’s largest economy. According to Credit Suisse overnight index swaps, investors see borrowing costs in Canada increasing by nearly 100bp over the next 12-months, and interest rate expectations may accelerate going forward as growth and inflation picks up.

Recent Economic Developments

The Upside

The Downside

As building activity in Canada gathers pace, with firms increasing their temperament to spend, businesses may continue to expand their labor force in 2011 as economic activity improves. However, as the rise in global trade cools, with households scaling back on consumption, businesses may keep a lid on employment as the central bank maintains a cautious outlook for the region. As the BoC highlights the ongoing weakness in the real economy and pledges to “carefully consider” future rate hikes, the central bank may retain its wait-and-see approach throughout the first-half of the year as the fundamental outlook remains clouded with high uncertainty.

Potential Price Targets For The Release

How To Trade This Event Risk

Expectations for a sixth consecutive rise in employment certainly reinforces a bullish outlook for the loonie, and the market reaction following the report could pave the way for a long Canadian dollar trade as growth prospects improve. Therefore, if the economy adds 25.0K jobs or more in February, we will need to see a red, five-minute candle subsequent to the data to establish 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 from the entry, and this risk will generate 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 preserve our profits.

In contrast, businesses may curb their willingness to expand their labor force given the slowdown in global trade paired with the stop in household spending, and the BoC may continue to talk down speculation for higher borrowing costs as the economic outlook remains clouded with high uncertainty. As a result, if employment increases less than 10.0K or unexpectedly contracts from the previous month, we will implement the same strategy for a long dollar-loonie trade as the short position laid out above, just in reverse.

Impact that the Canadian Employment report has had on CAD during the last month

January 2011 Canada Net Change in Employment

Employment in Canada jumped 69.2K in January after expanding 22.0K in the previous month, while the jobless rate unexpectedly increased to 7.8% from 7.6% during the same period as discouraged workers returned to the labor force. The breakdown of the report showed full-time positions increased 31.1K after rising a revised 40.5K in December, while the economy added 38.0K part-time jobs during the month. As growth prospects improve, the Bank of Canada may see scope to tighten monetary policy further this year, but the central bank is likely to retain its wait-and-see approach throughout the first-half of 2011 in an effort to encourage a sustainable recovery. Nevertheless, the Canadian dollar strengthened against its U.S. counterpart following the employment report, with the USD/CAD slipping to a intraday low of 0.9830, but the sharp selloff was short-lived as the pair ended the day at 0.9881.

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