Trading the Net Change in Canadian Employment

The Canadian dollar is likely to face increased selling pressures over the next 24 hours of trading as economists forecast employment to drop another 50.0K in March, while the jobless rate is anticipated to reach an eight-year high of 8.0%, and fears of a deepening recession are likely to weigh on the exchange rate as growth prospects deteriorate at a record pace. The fourth quarter GDP report showed that the annual rate of growth dropped the most since 1991, while labor productivity unexpectedly fell 0.5% from the third quarter, and the outlook for private-spending remains bleak as firms continue to cut back on production and employment in an effort to reduce costs. Moreover, business spending fell for the fifth consecutive month in March, while the leading indicator dropped 1.1% in February, which is the biggest decline since 1981, and the data continues to reinforce a dour outlook for growth and inflation as trade conditions falters. Canada’s trade deficit widened to C$993M in January, which is largest since recordkeeping began in 1971, as exports plunged 9.0% during the month, while manufacturing shipments dropped 5.4% to C$41.7B to reach its lowest level since May 1999, and conditions are likely to get worse as the U.S., Canada’s biggest trading partner, faces its worst recession in over half a century. As a result, BoC Governor Mark Carney dropped his reluctance to use tools beyond the interest rate to manage monetary policy, and said that the central bank stands ready to ‘provide additional monetary stimulus, if required’ through the use of credit and quantitative easing. Accordingly, market participants speculate that the central bank may cut the benchmark interest rate by another 25bp later this month as the economy faces its first recession since 1992, while policymakers may take additional steps to stimulate economic activity as the downturn in the global economy intensifies. Meanwhile, Finance Minister Jim Flaherty said that he saw ‘some small signs of little process’ during an interview with BNN television earlier this week, which spurred hopes for a recovery this year, but went onto say that he expects the downturn in the labor market to continue throughout the year. Mr. Flaherty went onto say that ‘we’ll do whatever we have to do to ease the way for Canada out of this recession and come out of it strongly,’ and the comments suggests that the government is considering to take further steps to jump-start the economy as growth and inflation falters.

Trading the given event risk clearly favors a bearish forecast for the Canadian dollar but nevertheless, an enhanced labor report could reinforce an improved outlook for the region, and would certainly set the stage for a long loonie trade. Therefore, if employment falls less than 30.0K with the jobless rate holding below 8.0%, we will look for a red, five-minute candle following the release to confirm a sell entry on two-lots of USD/CAD. Once these conditions are met, we will set our initial stop at the nearby swing high (or reasonable distance), and this risk will determine our first target. Our second target will be based on distraction, and in order to safeguard our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.

Conversely, deteriorating trade conditions paired with fears of a deepening downturn are likely to weigh on businesses, and a dismal labor report would certainly favor a bearish trade for the given event risk. As a result, an in-line print or a drop of more than 50.0K in employment would lead us sell the Canadian dollar, and we will follow the same setup for a long dollar-loonie trade as the short position listed above, just in reverse.