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USD/CAD: Trading the Canada Net Change in Employment Report

Fri, Mar 13 2009, 05:49 GMT
by Daily FX Research Team

DailyFX

Expectations for a 55.K drop in employment is likely to weigh on the Canadian exchange rate over the next 24 hours of trading, and would reinforce the dour outlook for growth and inflation held by the Bank of Canada as the world’s eighth largest economy faces a deepening recession.

Trading the News: Canada Net Change in Employment

What’s Expected

Time of release: 03/13/2009 11:00 GMT, 07:00 EST

Primary Pair Impact : USDCAD

Expected: -55.0K

Previous: -129.0K

Impact Canada’s change in employment had over USDCAD for the past 2 months

January 2009 Canada Unemployment Rate

Canada lost 129.0K jobs in January, which marked the largest drop in employment since comparable records began in 1976, and pushed the jobless rate to a four-year high of 7.2% from 6.6% in December, and conditions are likely to get worse as the region faces its first recession since 1992. The breakdown of the report showed that full-time positions fell another 113.9K after posting a 70.7K drop in December month, while part-time jobs slipped 15.1K from the previous month. The data continues to reinforce a dour outlook for growth and inflation, and undermines the BoC’s encouraging forecast for a pronounced recovery in 2010, which could lead policy makers to adopt a zero interest rate policy over the near-term in order to avoid a deepening recession. As a result, the BoC is likely to lower the key rate to 1.00% next month, which would be the lowest level since the central bank was established in 1934.

December 2008 Canada Unemployment Rate

The Canadian labor market shed 34.4K jobs in December amid expectations for a 20.0K drop in employment, which raised the annual rate of unemployment to a three-year high of 6.6% from 6.3% in the previous month. A deeper look at the report showed that the full-time jobs slipped another 70.7K during the month after falling 32.4K in November, while part-time positions increased 36.2K from the previous month as firms sought additional workers during the holiday season, and conditions are likely to get worse in the months ahead as Finance Minister Jim Flaherty expects a ‘substantial’ rise in the jobless rate this year. Fears of a deepening recession in the world’s eighth largest economy led BoC Governor Mark Carney and Co to lower the benchmark interest rate by 75bp to 1.50% last month, which is the lowest since 1958, and is likely to continue its easing cycle throughout the first half of the year in an effort to stimulate the ailing economy.

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 CAD against the US 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 CAD against the US 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.

How To Trade This Event Risk

Expectations for a 55.K drop in employment is likely to weigh on the Canadian exchange rate over the next 24 hours of trading, and would reinforce the dour outlook for growth and inflation held by the Bank of Canada as the world’s eighth largest economy faces a deepening recession. The GDP report for the fourth quarter showed that the annual rate of growth contracted 3.4% after expanding 0.9% in the third quarter, which was the biggest drop since 1991, and conditions are likely to get worse as trade conditions falter. A report by Statistics Canada showed that the nation posted its first trade deficit since 1976 as exports plunged 9.7% in December, which was the largest drop in foreign demands since 1982, and firms are likely to cut back on production and employment this year as firms face fading demands from home and abroad. Meanwhile, a separate report showed that private-sector spending within the region fell 5.4% from November, marking its biggest contraction since 1991, and foreshadows further weakness in the domestic economy as households face a weakening labor market paired with increased turmoil in the banking sector. As growth prospects deteriorate at a record pace, the BoC may continue to ease policy further even after lowering the benchmark interest rate to a record low of 1.00% this month, and is likely to adopt unconventional policy tools to stimulate the ailing economy as policy makers expect the economic downturn to intensify throughout the first-half of the year. As a result, BoC Governor Mark Carney dropped his opposition to use exceptional measures beyond the interest rate to shore up the economy, and said that the central bank stands ready to ‘provide additional monetary stimulus, if required’ through the use of credit and quantitative easing as policy makers employ all of their available tools to mitigate the downside risks for growth. Moreover, the board stated that they will hold the key rate ‘at this level or lower’ in an effort to jump-start the economy however, as the International Monetary Fund forecasts a global recession for 2009, fundamental headwinds are likely to weigh on the Canadian dollar going forward. Moreover, as investors continue to curb their appetite for risky assets, the U.S. dollar is likely to hold its bullish trend against the loonie over the near-term as the reserve currency continues to benefit from safe-haven flows.

Trading the given event risk clearly favors a bearish Canadian dollar trade as economists expect the jobless rate to push higher but nevertheless, an enhanced labor report would certainly set the stage for a long loonie trade, Therefore, if employment falls less than 20.0K or unexpectedly increases in February, we will look for a red, five-minute candle following the release to confirm a sell entry on two lots of USDCAD. Once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based on discretion, and in order to safeguard our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Conversely, mounting fears of a deepening recession paired with further weakness in the labor market is likely to lower the outlook for future growth, and would certainly lead us to short the Canadian dollar following a dismal release. As a result, an in-line print or a drop of more than 55.0K in employment would lead us to sell the loonie, and we will follow the same strategy for the long USDCAD trade as the short position listed above, just in reverse.

Published on  Fri, Mar 13 2009, 05:56 GMT