Canadian Jobs Preview: Employment sector improves but uncertainty prevails

• Canada eyes Net Change in Employment of 100K in August. 
• BOC stands pat, warns 4th covid wave could hamper recovery.
• A big blowout on the employment data is needed to rescue CAD bulls.

With the Bank of Canada (BOC) sitting tight on its monetary policy settings, WTI prices holding the lower ground and COVID-19- induced economic risks lurking, will USD/CAD extend its recent uptrend?

The Canadian employment sector is seen extending its recovery momentum in August after showing considerable improvement in July when the services sector contributed largely to the employment gains.

Statistics Canada is due to be published the August labor market report on Friday at 1230GMT. The North American economy is expected to witness a jobs growth of 100K in August as against a gain of 94K and 231K reported in July and June respectively. Although the economy continues with jobs creation, it is well short of the growth seen in the previous two months. The Unemployment Rate is seen falling further to 7.3% in August vs. July’s 7.5%. In July, the jobless rate missed expectations of 7.4%.

Source: FXStreet 

A disappointment in the Canadian employment figures cannot be ruled out amid the third wave of the COVID-19 pandemic-led restrictions in the country. While the US NFP data also missed expectations by a wide margin, arriving at 235K in August vs. 750K expected.

Restaurants, retailers and hospitality companies have all reported that hiring has been difficult because Canadians are seeking more stable employment, jobs they can complete from home and assurances that their workplaces won't be temporarily closed if another wave of the virus arrives.

Despite rising inflation, broad economic indicators continue to suggest an uneven economic recovery, especially after the latest GDP reading showed an economic contraction of 1.1% on a quarterly basis in the second quarter.

Against that backdrop and uncertainty around the election in October, the Bank of Canada (BOC) maintained its key interest rate at 0.25% alongside tapering, warning the fourth wave of the pandemic and supply bottlenecks could weigh on the economic recovery.

USD/CAD Probable Scenarios

Heading into Friday’s Canadian jobs data release, the US dollar’s rebound to weekly highs is seen fizzling out while WTI remains in a consolidative mode around $69 after pulling back from monthly tops of $70.61.

USD/CAD’s technical chart points to additional upside, suggesting that the Canadian jobs data could likely come in as a disappointment and/or the US dollar could resume its ongoing upbeat momentum amid the downbeat market mood. The dynamics in oil prices will be eyed as well.

USD/CAD: Four-hour chart

Should the dollar’s strength dominate, USD/CAD could see a fresh upswing towards the post-BOC highs of 1.2762. The pain in the Canadian dollar could be exacerbated if the jobs data fall short of the market’s expectations. The bulls could then seek a retest of the 1.2800 level.

However, if Canada’s labor market data blows past expectations, then it could offer some reprieve to the CAD bulls, fuelling a drop towards the demand area around 1.2590. That zone is the confluence of the 200 and 50-Simple Moving Averages (SMA) on the four-hour time frame. The Relative Strength Index (RSI) has inched lower from the overbought territory, currently sitting at 69.60, suggesting that there is room to rise for the major.