Canadian Employment Expected to Increase - Will It Help to Boost the Loonie?

Employment conditions in Canada are anticipated to improve for the second consecutive month as economists predicts the economy to add another 10.0K jobs in September. Despite the slowdown in the global economy, economic activity has certainly increased during the second half of 2008.

How To Trade This Event Risk

Employment conditions in Canada are anticipated to improve for the second consecutive month as economists predicts the economy to add another 10.0K jobs in September. Despite the slowdown in the global economy, economic activity has certainly increased during the second half of 2008. In fact, manufacturing shipments increased 2.7% in July amid expectations for a 1.0% gain, and was followed by a 2.3% rise in wholesale sales, which was much greater than the 1.0% increase projected by economists. Furthermore, the GDP reading for July surged to 0.7% from 0.1% in the previous month, while earlier this week we saw the Ivey PMI unexpectedly rebound to 61.0 from 51.5 in August. In addition, lower commodity prices have led the raw materials price index to fall -7.7% from a revised reading of 1.6% in July, which should help to boost economic activity in the near-term. Meanwhile, the repercussion effects of the coordinated rate cut by central banks all over the globe, which included a 50bp rate cut by the Bank of Canada, remains highly uncertain as credit conditions have yet to improve, but the central bank did note that upside price pressure have moderated on the back of falling energy costs. The BoC went onto say that the downside risks for growth have increased significantly as the U.S. financial crisis spills over into the global financial market, and left the door open for further easing in policy as they stated that the bank will take necessary action if economic conditions deteriorate further. As a result, overnight index swaps are showing that market participants expect the BoC to cut at least 125bp over the next 12 months amid the rate cut yesterday, which would only drag on the Canadian dollar going forward.

Despite mounting growth concerns for the U.S., the Canadian economy has certainly performed better than its trading partner to the south, and the recent rate cut by the central bank should help to support economic activity throughout the second half of the year. Therefore a rise in employment would favor a long Canadian dollar position (short USDCAD), and we will look for a red, rive-minute candle to confirm a trade on two lots of USDCAD. Our initial stop will be placed at the nearby swing low (or reasonable distance considering the level of surprise), and this risk will determine our first target. Our second target will be based on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade hits its target.

Nevertheless, an unexpected decline in employment would only heighten growth concerns for the economy, and spur bearish sentiment for the loonie. As a result, if the release failed to meet expectations, we will look for a green, five-minute candle to go long the USDCAD, and will follow the same setup as the short mentioned above, just in reverse.