USD/CAD - Canadian Dollar on Defensive Ahead of Data

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The Canadian dollar is on the defensive. The currency is consolidating this week’s losses but extremely vulnerable to this morning’s U.S. and Canadian employment report data. The Canadian dollar plummeted after the Bank of Canada pulled a policy U-turn and shifted to a dovish stance at their December 5 meeting. The optimistic outlook that was evident when they released the Monetary Policy Report and raised interest rates to 1.75% in October was replaced by a somewhat pessimistic view driven by plummeting oil prices and elevated global trade tensions.

Yesterday’s news that Canada arrested the Deputy Chair and CFO of Huawei on December 1, at the request of the Americans, triggered a wave of risk aversion demand for U.S. dollars, Japanese yen and Swiss francs. It also sent global equity markets into a tailspin. Prices have recovered somewhat overnight, but are still deep in the red. Traders are concerned that China’s anger over the Huawei CFO’s arrest will put an end to the China/U.S. trade war truce. Also, China may take their wrath out on Canada for enabling the Americans.

The Canadian dollar is with a negative bias ahead of the employment data. Canada is forecast to have gained 11,000 jobs in November while keeping the unemployment rate unchanged at 5.8% Arguably, it would take a significant upside surprise in the number of jobs to overshadow today’s U.S. employment data. Weaker than expected data would also result in diminished Bank of Canada rate hike expectations in January. In addition, the new BoC policy outlook suggests that Canadian dollar gains would be limited.

The U.S. data is sure to create some volatility. The U.S. dollar retreated from its best levels after Federal Reserve Chair Jerome Powell appeared to take a dovish outlook to U.S. monetary policy. His comments about being "close to neutral" and concerns about the impact of trade tensions led to many strategists trimming the number of Fed rate hikes in 2019. Where once there were four hikes predicted, now there are just two.

The Fed is data dependent and today's employment data is essential. The consensus forecast for non-farm payrolls is for a gain of 200,000 in November. Average hourly earnings will remain unchanged at 3.1%, and the unemployment rate will remain steady at 3.7%. If NFP surprises to the upside (some forecasters are predicting 250,000) the U.S. dollar will soar. That’s because markets will view the data as evidence that the U.S. economy is not slowing down.

Nevertheless, the impact from today’s data may be short-lived due to critical events next week which include the U.K. Brexit Parliament vote and E.U./Italy budget talks.

Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians