Canadian Jobs Preview: COVID-19 second wave to weigh on labor market recovery

• Canada set to see 100K job additions in October, participation rate seen steady. 
• The jobless rate is foreseen at 8.8% in Oct amid coronavirus second wave.
• Loonie’s reaction also hinges on the US NFP report and election results.

It’s a power-packed Friday for the loonie traders, as the highly-influential employment report drops in from both the US and Canada followed by the speeches from the Bank of Canada’s (BOC) Governor Tiff Macklem and Deputy Governor Lawrence Schembri.

Hiring seen slowing as coronavirus second-wave grips Canada

As the second wave of coronavirus threatens economic recovery, the Canadian labor market is likely to see anemic jobs growth in October.  The optimism over the September solid jobs report seen is likely to fade, as the North American economy is seen adding 100,00 jobs last month, the smallest gain in six months. The projected net change in employment paints a better picture than that during the pre-coronavirus times. In September, Canada added 378,200 jobs, as the economy continued to reopen from coronavirus lockdowns.

   

The jobless rate is likely to extend its declining trend below 10% into the second month in October, falling to 8.8% vs. 9.0% recorded previously. Despite the reduction in employment, the participation rate is seen steady at 65%. Meanwhile, the average hourly wages stood at 5.43% in September.

October’s employment numbers will likely reflect the real impact on the labor market from the second wave, as the new restrictions to contain the contagion were imposed in Ontario and Quebec during the survey period. These two provinces had announced the closure of indoor dining, gyms and other close-contact services in some of the urban areas, including Toronto and Montreal.

USD/CAD: Probable scenarios

As mentioned before, plenty of event risks is stacked for the major, with the response to the US NFP data likely to overshadow the impact of the Canadian jobs report, irrespective of a disappointment or a positive surprise. The US economy is expected to 600K jobs in October vs. 661K in September while the unemployment rate is seen falling to 7.7% in the reported month vs. 7.9% prior.

The US dollar price-action will be closely followed in the aftermath of the US election results and the FOMC monetary policy decision, which could have a strong bearing on USD/CAD. Markets are seeing Democratic candidate Joe Biden at the White House, although the Senate is likely to be in the control of the Republicans. Meanwhile, the Fed is expected to stand pat on its current policy stance amid coronavirus resurgence and absence of fiscal stimulus aid.

Further, the reaction to data could be limited, as loonie traders will stay focused on Governor Mackem’s speech. The Canadian central bank left its key rates unchanged while reinforced its commitment to keep rates lower over the next few years. The BOC, however, announced adjustments to its QE programme in a surprise move at its policy decision last month.  

Looking at the technical picture, the spot is holding onto critical support of the two-month-old ascending trendline at 1.3100. Upbeat Canadian and US jobs data could bode well for the Canadian dollar, paving the way towards October lows of 1.3081, below which the 1.3000 level will be put to risk. A strong US NFP report could boost the stocks, weighing down on the safe-haven US dollar.

Discouraging data from both the North American nations could offer a much-needed reprieve to the USD/CAD bulls. Recapturing the 21-daily moving average (DMA) at 1.3185 is critical to attempt a recovery from two-week lows.