Canadian Jobs Preview: CAD ready for a comeback? Three reasons for a positive surprise

Ottawa kicks off its annual Winterlude festival on Friday – which will be different from previous years – but C$ traders could see a warmer jobs report from the Canadian capital. The economic calendar is pointing to a loss of 47,500 positions in January, following a 62,600 decrease in December.

However, there are three reasons to expect a better outcome. 

1) Canada is coping with covid: While the nation's freezing temperatures mean people spend more time indoors, the rate of infections has been lower than other places – and decreasing. The retreat of that disease that is gripping the world is a positive development that could turn into a better outcome in the labor market.2)

Source: FXStreet

2) Examing the recent report, it seems that economists have zigzagged from over-optimism to over pessimism in the past few months. After expectations proved too high in December, Canada may have lost fewer jobs – or have even made gains in January. 

Source: FT

3) Looking south: America's labor also shrank in December, but expectations for January's Nonfarm Payrolls are also on the upside. As around three-quarters of Canadian exports go to the US, rising demand from south of the border have may positively impact hiring. 

All in all, there is a robust case for an upside surprise. Will the loonie rise and USD/CAD fall?

USD/CAD reaction

An upbeat jobs report may boost the loonie and also unleash more gains related to rising oil prices. The C$ has yet to respond to the gradual increase in crude, a result of high compliance by OPEC+ members and optimism about the impact of vaccines on the global economy. CAD could climb now, in a belated response. 

On the other hand, it is essential to note that US Nonfarm Payrolls is published at the same time and could lead to choppy price action in the dollar. On the one hand, upbeat employment figures may boost the dollar as they imply stronger US growth and push the Federal Reserve to tighter momentary policy.

On the other hand, they could curb the enthusiasm in Washington for further stimulus. The same considerations are in play in the case of a downbeat NFP, which would equally trigger a choppy reaction.

Conclusion

There is a good case for Canada's job figures to have beaten estimates in January and the loonie has room to rise. However, US Nonfarm Payrolls may prompt choppy price action.

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