The Canadian dollar has fallen after the jobs data which showed Canada losing jobs 51,600 jobs whereas a gain of 5,000 was expected. In the U.S., 210,000 jobs were added largely in line with the 200,000 gain expected. The U.S. dollar has strengthened and the Canadian dollar has fallen on the news.
The Canadian dollar has been playing defense ever since the U.S./Canada trade negotiation came and went. Bank of Canada monetary policy is on hold, domestic Gross Domestic Product was slightly weaker than forecast and U.S. President Trump and Prime Minister Trudeau trade insults. The Canadian dollar weakened sharply, and the technical bias switched to bearish from bullish.
The world was looking pretty bleak for the Canadian dollar until yesterday afternoon. Bank of Canada Deputy Governor Carolyn Wilkins gave a speech in Saskatchewan, and she put an optimistic spin on the Canadian economy and the Canadian dollar.
Ms Wilkins speech was titled An Update on Canada’s Economic Resilience. She described last week’s GDP report as being "right on the money" in terms of Bank of Canada expectations, pointing out that the economy grew at twice the pace as it did in Q1.
She pointed out that the housing market was stabilizing and that borrowers and lenders had adjusted to the new higher rate regime. She admitted that the BoC was surprised by the 3% inflation print in July but explained the jump was due to "temporary" factors.
She noted that trade tensions were a concern. The uncertainty causes business to limit investment in new capacity, despite rising demand. Some companies even contemplate investing in the U.S. as a way of circumventing the U.S./Canada trade issues. The BoC estimates that the reduced confidence and the trade tariffs already in place will trim 0.75% off Canada's GDP by 2020.
The BoC did not include current trade discussions in their models although they were discussed in Wednesday’s policy meeting. Then she said, "Governing Council also discussed whether the gradual approach to raising rates that we have been taking over the past year remains appropriate."
That got Canadian dollar traders attention. USD/CAD dropped from $1.3224 before her speech to $1.3115 overnight. Traders decided that meant the BoC could raise rates faster than expected, especially if the U.S./Canada trade talks are successfully concluded.
Today is employment report day in Canada and the U.S. Canada August employment data is forecast to rise 5,000 compared to July’s 54,000 gain. The Canadian dollar would rally more on a strong report than it would if the data was weak. That’s because a weak report is expected and a strong report would support further BoC rate increases. Canada Ivey Purchasing Managers Index data is also on tap, but any reaction to the data should be limited due to the North American Free Trade Agreement talks.
U.S. non-farm payrolls (NFP) are expected to show a gain of 191,000 jobs and a decrease in the unemployment rate to 3.8% from 3.9%. The NFP forecast has been revised higher since the beginning of the week, suggesting traders are looking for an upward surprise to the result. Arguably, that puts the U.S. dollar at risk as a weaker than expected result would have a more significant impact on trading due to current sentiment and positioning. However, unless the data is super-weak or super-strong, FX moves may be restricted because of China tariff concerns.
The Canadian dollar would benefit from a weaker U.S. report as it would lead to widespread U.S. dollar selling among the G-10 major currencies.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians