The Canadian dollar may face increased selling pressures over the next 24 hours of trading as economists forecast employment to fall 35.0K in June, and fears of a protracted economic downturn could weigh on the exchange rate over the near-term as the central bank maintains a dovish outlook for future policy.
[B][U]Trading the News: Canada Net Change in Employment
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[B][U]What’s Expected[/U][/B]
Time of release: [B]04/09/2009 11:00 GMT, 07:00 EST[/B]
Primary Pair Impact[B] : USDCAD[/B]
Expected: -35.0K
Previous: -41.8K
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[B][U]Impact Canada’s change in employment had over USDCAD for the past 2 months[/U][/B]
[U]May 2009 [/U][U]Canada[/U][U] Unemployment Rate[/U]
Employment in Canada plunged 41.8K in May, with the jobless rate rising to an 11-year high of 8.4%, and conditions are likely to get worse as businesses continue to scale back on production and employment following the downturn in global trade. The breakdown of the report showed full-time positions slumped 58.7K from April, with self-employment falling 32.0K, while part-time jobs increased 17.0K during the month. The data foreshadows a weakening outlook for the region as households face a weakening labor market paired with the slump in housing, and conditions may get worse throughout the year a trade conditions falter. As a result, the Bank of Canada continued to hold borrowing costs at the record-low for the second time in June, and pledged to hold the interest rate at 0.25% throughout the first half of 2010 in an effort to stimulate the ailing economy.
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April 2009 Canada Unemployment Rate[/U]
Labor demands in Canada unexpectedly rose in April, marking the first increase in six months, with employment rising 35.9K from the previous month, led by a 39.4K jump in full-time positions. At the same time, the annual rate of unemployment held steady at the seven-year high of 8.0% for the second consecutive month in April, and the data encourages an improved outlook for the world’s eighth largest economy as policymakers take unprecedented steps to stem the downside risks for growth and inflation. However, as businesses face fading demands from home and abroad, firms may continue to scale back on production and employment throughout the second-half of the year in an effort to lower their cost structure. As a result, the BoC is widely expected to hold the benchmark interest at the record-low of 0.25% and may adopt unconventional measure over the near-term in order to jump-start the economy.
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What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[B][U]Bullish Scenario:[/U][/B]
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If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the CAD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on USDCAD ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the CAD against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on USDCAD ahead of the data release.
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How To Trade This Event Risk[/B]
The Canadian dollar may face increased selling pressures over the next 24 hours of trading as economists forecast employment to fall 35.0K in June, and fears of a protracted economic downturn could weigh on the exchange rate over the near-term as the central bank maintains a dovish outlook for future policy. At the same time, the International Monetary Fund raised its outlook for the world’s eighth largest economy, and projects economic activity to fall at an annual rate of 2.3% this year amid an initial forecast for a 2.5% drop in GDP, while the group expects the growth rate to expand 1.6% in 2010. However, a report by Statistics Canada showed the trade balance unexpectedly fell to -0.2B in April, driven by a 5.1% drop in exports, while retail spending plunged 0.8% in May as households faced a weakening labor market. Moreover, wholesale sales slipped for the seventh consecutive month in May, while the economy shrank for the ninth month in April, and businesses may continue to scale back on production and employment throughout the second half of the year as they face fading demands from home and abroad. As a result, the Bank of Canada is widely expected to hold the benchmark interest at the record-low of 0.25% throughout the first half of the following year, and may adopt policy tools beyond to interest rate to stimulate the ailing economy as the outlook for global growth remains weak. However, researchers at the central bank argued bond purchases by the BoC could ‘distort the capital and credit allocation process,’ and saw high uncertainties tied to ‘quantitative easing,’ which could hamper the prospects for a sustainable recovery. Meanwhile, Governor Mark Carney said that the ‘bank retains considerable flexibility in the conduct of monetary policy’ during June rate decision even as borrowing costs remain at a record-low, but went onto say that the recent appreciation in the Canadian dollar could ‘fully offset’ the pick-up in economic activity, which rises the risk of a protracted downturn. Moreover, the central bank head expects the economic recovery to be ‘more muted than usual’ and forecasts GDP to contract at an annual rate of 3.0% this year, and fears of a protracted downturn is likely to weigh on the exchange rate as investors weigh the outlook for future policy. However, a rise in market sentiment paired with higher oil prices could temper the reaction to a dismal employment report as risk trends continue to drive price action in the currency market.
Expectations for a 35.0K drop in employment favors a bearish forecast for the Canadian dollar but nevertheless, the jump in business spending paired with the rebound in housing starts has left the door open for an enhanced labor report. Therefore, if payrolls fall 20.0K or less in June, we will look for a red, five-minute candle subsequent to the release to confirm a sell-entry on two lots of USD/CAD. Once these conditions are met, we will place our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.
On the other hand, the slump in global trade paired with rise in raw material prices may lead businesses to take further steps to lower their cost structure, and price action following the release could set the stage for a short Canadian dollar trade. As a result, an in-line print or a drop of more than 35.0K in employment would favor a bullish outlook for the USD/CAD, and we will follow the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.
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