Canadian Dollar bounces from two-month lows ahead of US, Canadian jobs data

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The Canadian Dollar (CAD) pares some losses against the US Dollar (USD) on Friday, with the USD/CAD pair trading at 1.3880 at the time of writing after hitting a two-month high of 1.3925 on Thursday.

USD/CAD is trading at 1.3880, after pulling back from two-month highs at 1.3925 on Thursday.
US employment is expected to show a robust labour market, while in Canada, markets foresee a mild rebound in net jobs.
Analysts at ING Bank see chances that the pair tests 1.40 in the coming days.

The Canadian Dollar (CAD) pares some losses against the US Dollar (USD) on Friday, with the USD/CAD pair trading at 1.3880 at the time of writing after hitting a two-month high of 1.3925 on Thursday. The US Dollar is trading lower across the board on Friday, but the trend might shift after the release of US and Canadian jobs data, due later on the day.
The US Nonfarm Payrolls report is expected to show an 85K increase in net jobs in May, following an 115K increase in April. These figures are consistent with a significant stabilisation of the labour market, compared with the 10K average increase seen last year, and would provide further reasons for Federal Reserve (Fed) hawks to call for interest rate hikes if inflation pressures remain high.

In Canada, the Net Change in Employment is expected to show a 10K increase following a 17.7K decline in April, while the Unemployment rate is expected to remain steady at 6.9%. The broader trend in this case remains weak, with net jobs declining in three of the previous four months, and the economy in “technical recession.”

Francesco Pesole, analyst at ING Bank, sees little room for further Canadian Dollar recovery, and warns about the chances that the USD/CAD pair tests 1.40 in the coming days: “Our view remains more dovish than the market on the BoC, which still appears to have a higher bar for hiking rates than the Fed due to domestic economic challenges and uncertainty about the USMCA (...) So, while our call beyond the short term still leans USD bearish, we remain less excited about the loonie's potential relative to other commodity currencies (the Australian dollar, New Zealand dollar, and Norwegian krone). In the coming days, the risks of a test of 1.40 in USD/CAD are non-negligible.”

Economic Indicator

Nonfarm Payrolls

The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months' reviews and the Unemployment Rate are as relevant as the headline figure. The market's reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.

Why it matters to traders?

America’s monthly jobs report is considered the most important economic indicator for forex traders. Released on the first Friday following the reported month, the change in the number of positions is closely correlated with the overall performance of the economy and is monitored by policymakers. Full employment is one of the Federal Reserve’s mandates and it considers developments in the labor market when setting its policies, thus impacting currencies. Despite several leading indicators shaping estimates, Nonfarm Payrolls tend to surprise markets and trigger substantial volatility. Actual figures beating the consensus tend to be USD bullish.

Economic Indicator

Net Change in Employment

The Net Change in Employment released by Statistics Canada is a measure of the change in the number of people in employment in Canada. Generally speaking, a rise in this indicator has positive implications for consumer spending and indicates economic growth. Therefore, a high reading is seen as bullish for the Canadian Dollar (CAD), while a low reading is seen as bearish.

Why it matters to traders?

Canada’s labor market statistics tend to have a significant impact on the Canadian dollar, with the Employment Change figure carrying most of the weight. There is a significant correlation between the amount of people working and consumption, which impacts inflation and the Bank of Canada’s rate decisions, in turn moving the C$. Actual figures beating consensus tend to be CAD bullish, with currency markets usually reacting steadily and consistently in response to the publication.