USD/CAD: Trading the Canadian Employment Report

The Canadian economy is anticipated to add another 20.0K jobs in May following the 58.3K expansion in the previous month, and the ongoing improvement in the labor market is likely to spark a bullish reaction in the local currency as growth prospects improve.

Trading the News: Canada Net Change in Employment

What's Expected:

Time of release: 06/10/2011 11:00 GMT, 7:00 EST

Primary Pair Impact:USDCAD

Expected: 20.0K

Previous: 58.3K

DailyFX Forecast: -10.0K to 10.0K

Why Is This Event Important:

The Canadian economy is anticipated to add another 20.0K jobs in May following the 58.3K expansion in the previous month, and the ongoing improvement in the labor market is likely to spark a bullish reaction in the local currency as growth prospects improve. As the economic recovery gathers pace, the Bank of Canada may raise its fundamental assessment for the region, and the central bank may show an increased willingness to raise the benchmark interest rate in the second-half of the year as policy makers expect inflation to hold above 3% in the near-term. However, BoC Governor Mark Carney may retain his pledge to ‘carefully consider' future rate hikes should the employment report fail to meet market expectations, and central bank head may continue to strike a balanced tone for future policy as the economic outlook remains clouded with uncertainties.

Recent Economic Developments

The Upside

Release	Expected	Actual
Ivey Purchasing Manager Index s.a. (MAY)	55.2	65.5
Leading Indicators (MoM) (APR)	0.6%	0.8%
International Merchandise Trade (MAR)	0.4B	0.6B

The Downside

Release	Expected	Actual
Raw Materials Price Index (MoM) (APR)	3.0%	6.8%
Gross Domestic Product (QoQ) (1Q)	4.0%	3.9%
Retail Sales (MoM) (MAR)	0.9%	0.0%

The rebound in business spending paired with the expansion in global trade certainly raises the likelihood of seeing a positive employment report for May, and firms may continue to expand their labor force over the coming months as the recovery picks up. However, the downturn in household spending paired with the rise in raw material prices may lead businesses to scale back on hiring, and the BoC may look to retain its wait-and-see approach in the third quarter as it aims to balance the risks for the region. In turn, the near-term rally in the USD/CAD may gather pace heading into the second-half of the year, and the exchange rate may work its way back towards parity as it retraces the decline from earlier this year.

Potential Price Targets For The Release

How To Trade This Event Risk

Projections for a second consecutive rise in employment fosters a bullish outlook for the Canadian dollar, and the market reaction to the report could set the stage for a long loonie trade as the outlook for future growth improves. Therefore, if the economy adds 20.0K jobs or more in May, we will need to see a red, five-minute candle following the release to establish a sell entry on two-lots of USD/CAD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot breakeven once the first trade reaches it mark in an effort to protect our winnings.

In contrast, the slowdown in global trade paired with the ongoing weakness in private consumption may lead businesses to keep a lid on hiring, and a dismal labor report is likely to weigh on interest rate expectations as the central bank maintains a cautious outlook for the region. As a result, if employment increases less than 10.0K or unexpectedly contracts from the previous month, we will carry out the same strategy for a long dollar-loonie trade as the short position laid out above, just in reverse.

Impact that the Canadian Employment report has had on CAD during the last month

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
Apr 2011	5/06/2011 11:00 GMT	20.0K	58.3K	+8	+36

April 2011 Canada Net Change in Employment

Employment in Canada increased 58.3K in April to mark the biggest advance since January, while the jobless surprisingly fell back from 7.7% to 7.6% during the same period. A deeper look at the report showed a 17.2K rise in full-time positions, while part-time jobs increased 41.1 after contracting 92.1K in March. The rebound in employment certainly reinforces an improved outlook for future growth, but the Bank of Canada is widely expected to carry its wait-and-see approach into the second-half of the year as the central bank continues to highlight the ongoing weakness within the real economy. In turn, we may see BoC Governor Mark Carney preserve his pledge to ‘carefully consider' future rate hikes in the coming months, and the central bank head may continue to strike a balanced tone for monetary policy in order to encourage a sustainable recovery in Canada. Indeed, the initial reaction to the rebound in employment was short-lived, with the USD/CAD bouncing back to 0.9650, and the Canadian dollar struggled to hold its ground throughout the North American trade as the exchange rate settled at 0.9665.

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To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com