Lost in the noise of Friday’s hurricane-ridden US jobs report was another strong report from Canada. Canada is the miraculous nation, who has yet to witness a real-estate crash after emerging unscathed from the 2008-2009 market crisis. Its central bank has also raised interest rates two years after an oil-recession.
On Friday Canada’s labour market showed the 10th consecutive straight month of employment gains, the longest positive streak since 2007-8. Annual average wage gains rose by 2.2%, the fastest gain in over a 1 ½ year. The private sector declined 15,500. The unemployment remained at 9-year lows of 6.2%, while youth unemployment dipped to a record low 10.3%.
Traders who were late to join the selling of USD/CAD pair near end of September had to deal with an unwelcome rebound after Bank of Canada governor Stephen Poloz cautioned that the central bank wanted to see the effects of the last two rate hikes and their interaction with the strengthening Canadian dollar as well as the increasingly leveraged real estate market.
The rhetorical retreat from the Bank of Canada means that a 3rd rate hike this year is off the table, but it certainly does not mean the currency is falling off the table anytime soon. USDCAD’s September rebound is nothing but a corrective move and a fresh opportunity for the bears.
Most crucially to remember is that at a time of deteriorating government budgets in the G7, Canada enjoys an increasingly structural advantage, whereby its budget deficit is less than 1% of GDP, compared with 3.7%, 2.4% for the US and UK respectively. Why is this important for FX traders? Not only it places Canadian dollar near the currencies that benefit from falling risk appetite in the markets, but also has enabled the government to deliver tax cuts last year, something that no major G5 nation could contemplate due to their deteriorating fiscal balances.
What about CAD’s relationship with oil? Can we see renewed declines in USDCAD without a fresh rally in energy prices? 2017 has demonstrated the USDCAD pair is more closely tied to the USD index than with the price of crude or Brent oil. Weekly correlation between USDCAD and USDX so far this year stood at 0.52 compared to -0.32 for USDCAD and US crude oil. Instead of requiring an aggressive rally in oil as a precondition for USDCAD below 1.20, all that may be needed is for prices to stand above $45 and for the Fed to remain constrained from raising interest rates.