Canada’s upcoming jobs statement may determine whether or not BOC can continue.
So what can market observers expect from this outstanding report?
Here’s what you need to know.
Focus on the event:
Canadian employment data for June: change in employment, unemployment rate
When will it be released:
July 7, 2023 (Friday) 12:30 PM GMT
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Expectations:
- Clear – 10,000 jobs It lost in June, after cutting 17.3K earlier in May
- Unemployment rate increased from 5.2% to 5.4%
- Hourly wage rate slows to 4.3% vs. 5.1% yoy in May
Related data since the last data event/release:
- S&P Canadian Global Manufacturing Index for June: 48.8 vs. 49.0 in May; declining market demand as customers delay spending decisions (most likely due to higher interest rates and macroeconomic uncertainty); Firms, on average, have chosen to reduce their staffing levels.
Previous issues and the impact of the risk environment on the Canadian dollar
June 9, 2023
Event Results/Price Action:
The Canadian economy lost 17.3 thousand jobs in May, compared to expectations for an increase of 21.2 thousand in employment. This raised the unemployment rate from 5.0% to 5.2%, above the consensus of 5.1%.
The downbeat report forced the Canadian dollar to regain some of the gains made earlier in the week, but the initial bearish reaction was short-lived.
Risk Environment and Internal Market Behaviors:
The oil-linked currency was actually off to a positive start on Monday after OPEC+ announced voluntary production cuts over the weekend.
The Canadian dollar extended its gains when the Bank of Canada surprised with a 0.25% interest rate hike and signaled that it is ready to continue rising until inflation returns to target.
Renewed recession fears weighed on oil prices and the related Canadian dollar ahead of the jobs release, but the high-yielding US dollar managed to rally higher late Friday when risk sentiment improved on positive Chinese bank rate news.
May 5, 2023
Overlaying the Canadian Dollar Against Major Foreign Currencies: 1-Hour Forex Planned by TV
Event Results/Price Action:
Canada saw 41.4k additional jobs in April, nearly double the estimated increase of 21.6k. This was also significantly higher than last month’s gain of 34.7K in employment.
With this, the unemployment rate held steady at 5.0% for the fifth consecutive month instead of rising to the estimated figure of 5.1%.
Not surprisingly, the Canadian dollar rallied across the board when traders got stronger-than-expected winds of the jobs data, as this underscored hawkish remarks made by BoC President McCallum the day before.
Risk Environment and Internal Market Behaviors:
This wasn’t exactly the best of weeks for the Canadian dollar bulls, as risk-off flows were playing a strong role early on on concerns about the US banking sector and possible government default.
However, the tide turned when risk appetite improved in the middle of the week due to debt ceiling developments and Governor McCallum hinted that the Bank of Canada was not done raising interest rates just yet.
These allowed the Canadian dollar to rally ahead of the jobs announcement on Friday and may have helped the Canadian currency to maintain its rally into the end of the week.
Price action odds:
Possibilities of feeling risky:
This trading week comes with a few high level catalysts, including the RBA decision, FOMC meeting minutes and the NFP release. The OPEC meetings are also scheduled around the middle of the week, so any major announcements could also influence CAD price action ahead of Friday’s employment report.
The FOMC meeting minutes will probably have the biggest potential impact on risk sentiment heading into Friday, and unless we notice a significant divergence in rhetoric from what we’ve provided recently (ie central banks remain tight about fighting inflation and there’s likely to be two more of the Fed’s 2023 rate hikes), it may not affect risk sentiment too much.
Right now, we’re seeing broad risk-on sentiment with some anti-dollar sentiment, so we might see that heading into Friday’s data, barring any big surprises between now and then.
A final note on the risk environment: Uncle Sam will be printing the NFP at exactly the same time as the Canadian jobs release, so CAD pairs may be more sensitive to general market sentiment and the direction of the US dollar at that time.
Canadian dollar scenarios:
Possible base scenario:
With the Canadian employment outlook expected to slow in June, we believe that if that happens, we could see selling pressure on the Canadian dollar this week. The slower jobs environment supports the idea that the BOC has the potential to pause at their next meeting.
The BoC already surprised markets with its 0.25% rate hike in its June decision, so the prospect of returning to a “pause mode” could be enough to encourage the Canadian dollar bulls to pull out some long/profit-taking and tactical bears. New short positions against currencies with tighter central bank regulations.
As with previous releases, a lot hinges on how much it affects market sentiment on most days of the week. Risk flows from fading recession fears may sustain the Canadian dollar sell-off.
In that case, keep an eye out for short-term CAD opportunities intraday, especially against currencies from countries that still have high expectations for future interest rate hikes.
But in the future, the NFP will be released at the same time, the volatility and directional bias will have an increasing level of uncertainty, so be aware of your risk management decisions at that time.
Possible alternative scenario:
The surprisingly upbeat Canadian jobs number will be different from both expectations and the sluggish employment gains so far this year. The positive reading could be enough to reignite hopes for a BoC hike later this month and attract short-term Canadian dollar support from both financial and technical traders.
If risk-based flows are in play most days of the week, the Canadian dollar could be in for a more sustainable rally against its forex peers. In this scenario, look for potential long CAD positions in the short term against currencies as central banks remain open to slowing or stopping the pace of interest rate tightening all together.