Canadian Dollar May Target New 30-Year Highs On Labor Market Data

Net Change In Employment (JUN) (11:00 GMT; 07:00 EST) Unemployment Rate (JUN) (11:00 GMT; 07:00 EST)
Expected: 17.0K Expected: 6.1%
Previous: 9.3K Previous: 6.1%

How Will The Markets React?
The Canadian labor market is anticipated to tighten for the second consecutive month in June, with 17,000 workers predicted to have been hired on net, leaving the unemployment rate at a 33-year low of 6.1 percent. While there have been multiple indications that price pressures have started to ease, the Bank of Canada is still widely expected to hike rates next Tuesday by 25bps to 4.50 percent. Indeed, consistent improvements in labor market conditions that have added about 1.9 million jobs since 2001 is starting to bring the economy near full capacity. During the BOC’s last meeting, the bank stated that there was “excess demand” in the economy as the performance of the labor market has led to record consumer spending while rising energy and housing costs have boosted inflation risks. However, there is some potential that the labor report will not be as encouraging as expected after the employment component of the Ivey Purchasing Managers Index slipped to a three month low of 58.5. Nevertheless, the figure remains well above the 50 level, signaling that the majority of businesses believe that the labor market is improving.
Bonds - 10-Year Canadian Government Bond Futures
For the past few weeks, 10-year Canadian government bonds have slowly ascended as risk aversion permeated throughout the markets. However, heavy resistance at 111.00 has limited some of those gains as CGBs dropped for the third consecutive day to 110.03 with yields up 6.3bps at 4.728 percent. Friday?s employment data could determine whether CGBs resume their uptrend or crash through support at 110.00, as further tightening of the labor market will only ramp up speculation of monetary policy tightening by the Bank of Canada next Tuesday. However, with inflation pressures starting to let up a bit, a particularly disappointing net employment change could send CGBs bouncing back towards resistance near 111.00.

10-Year Canadian Government Bond Futures (Daily Chart) [B]

The Canadian dollar has held onto its 30-year highs over the past few weeks, holding within a 200 point range of 1.0550 - 1.0750. USDCAD is hugging the bottom of the range, but with major event risk on the Canadian dollar AND US dollar sides, the pair is not likely to stay where it is for very long. Canadian employment data tends to be highly market moving for the Loonie, especially when the figure shows an improvement - as it is anticipated to do this Friday. Meanwhile, the infamous and notoriously difficult-to-handicap US NFP report is due to be released the same morning. Payrolls are predicted to fall to 123K from 157K, but there are signs that the report could actually prove to be much softer than estimates as ISM manufacturing, the Hudson employment index, jobless claims, and the employment index all point to weak US labor market figures in June.
The combination of a strong Canadian net employment change along with a weaker-than-expected US NFP report could prove deadly for USDCAD and drive the pair down through 1.0550. However, the pair may have difficulty getting much further than 1.0500, but with the Bank of Canada expected to hike to 4.50 percent next week, it may only be a matter of time before the Loonie hits new highs. On the other hand, if Canada?s net employment change proves to be disappointing, USDCAD price action will become far more reliant on broader US dollar flows and could lead the pair to continue to hold its recent range.
For more on the US NFP report and its impact on the dollar, check out the NFP Previewby Kathy Lien and Terri Belkas.
[B]USD/CAD (Daily Chart)

Equities - S&P/TSX Composite Index
Canada’s benchmark equity index, the S&P/TSX Composite Index went little changed on Thursday, closed up 0.1 percent at 14,079.41 in Toronto. Canadian technology stocks led gains following reports that Research In Motion Ltd. obtained permission to sell its BlackBerry e-mail phone in China. Shares of Research in Motion rose 3.9 percent to C$228.59, leading a gauge of technology stocks within the S&P/TSX up 1.8 percent. Meanwhile, a pick up in bond yields led Manulife Financial Corp. shares to tumble 1.4 percent to C$39.46, as investors speculated that rising interest rates may hurt banks and insurers.
For almost a year, the S&P/TSX had held a steady uptrend, though the May 23rd high of 14,216.21 has provided some resistance for further gains. In fact, even the 14,100 level has proven difficult to overtake over the past few days. Major event risk looms on the horizon as well, with Canadian labor market data due to be released on Friday and the Bank of Canada scheduled to announce their rate decision next Tuesday. The central bank is widely anticipated to raise their benchmark to 4.50 percent, despite an easing in price pressures. However, given the lack of spare capacity in the economy, a pick up in employment levels will only add to speculation of an increase in interest rates next week and could lead the S&P/TSX back below 14,000 on Friday.
[B]S&P/TSX Composite Index (Daily Chart)