Canadian jobs preview: Key point for CAD at a sensitive timing

• Canada is expected to report a more modest jobs report for August.
• The data is critical for the projected rate hike in October.
• A rate hike and the greater USD/CAD moves depend on NAFTA.

Canada publishes the labor market report for August on September 7th, at 12:30 GMT. The level of employment is a major market mover everywhere, and also in Canada, it has a significant effect on the value of the Canadian Dollar. 

Modest expectations

Canada saw a jump of 54,100 jobs back in July, outperforming expectations. However, the response was quite lukewarm, due to the underlying information. The nation lost full-time positions and gained part-time ones. Moreover, wages growth decelerated to 3.0% substantially lower than a robust increase of 3.9% back in May and 3.5% in June. The unemployment rate stood at 5.8% with a participation rate of 65.4%.

Projections for August are more modest: an increase of only 5,000 new positions and an increase of the jobless rate to 5.9%. The participation rate is forecast to remain unchanged. 

Low expectations make sense after the sharp increase in the previous month. However, they also open the door to an upside move in the C$ in case employment data exceeds expectations. A lower bar is easier to cross.

Timing

The US publishes its own labor market data at the exact same time. The Non-Farm Payrolls tend to have a considerably stronger impact on markets. Nevertheless, a large-scale surprise in Canada's publication will likely tilt the USD/CAD lower, in favor of the loonie, regardless of the American data.

Contrary to Canada, the US disappointed with mediocre job growth in July and current expectations are for a return to average gains in positions. Wages matter also in the US.

Another timing factor is NAFTA negotiations. Canada is heavily reliant on US demand. After Mexico and the US struck a deal, it initially seemed very likely that Canada will soon be included. However, the August 31st deadline came and went without an agreement. Negotiations resumed on Wednesday, and the aim is to reach a deal this Friday. 

At the time of writing, there are reports of progress in the talks. In case they reach an accord on Friday, the USD/CAD will likely fall, regardless of the labor market data in both countries. In case they announce another break up of the negotiations, the pair is to shoot higher, also ignoring the data. To get a straightforward reaction to the data, NAFTA headlines should stay out of the way.

BOC October Hike

The Bank of Canada decided to leave interest rates unchanged at 1.50% on Wednesday, as broadly expected. The team led by Governor Stephen Poloz maintained the hawkish bias, saying that rate increases are warranted. Markets assume a high chance of a rate hike in the next meeting of the Ottawa-based institution in October.

The BOC is data dependent and can change its mind. An underwhelming employment report may change their minds. Reasonable data will be good enough for them to move forward, depending on other data and on a successful NAFTA renegotiation.

Conclusion

The Canadian jobs report is a significant market mover for the Canadian Dollar. Low expectations could result in an upside surprise. The simultaneous release of the US NFP and the all-important NAFTA negotiations