The USDCAD is trading just off multi-month highs ahead of a key data release on Friday. With most central banks in tightening mode, the BOC is falling behind. The market is now starting to speculate whether Canada’s central bank will have to hike. But that would require a rebound in the data, signalling room for tightening.
Economists expect a rebound in Canadian employment data after August’s surprise negative numbers. A return to positive employment growth would be a baseline requirement for the BOC to consider hiking. A hike could finally support the loonie and turn the USDCAD around. However, another disappointing data print might allow the pair to break to new multi-month highs ahead of the weekend.
Yields Outweigh the Data
Upside for the USDCAD has relied on a fairly strong greenback and continued weakness in the loonie. Friday’s US Non-Farm Payrolls came in well below expectations, which initially weakened the American dollar. However, traders were quick to buy the dip as the gap in yields between the countries remained just as wide.
The recent FOMC minutes release also didn’t change the situation all that much. This came despite the perception that the Fed was more hawkish than markets anticipated. Yields remained relatively unchanged, as the odds of a Fed hike by the end of the year stayed the same. This means fluctuations in the USDCAD could depend more on what happens north of the border than south.
Markets Ignoring Positive Data, Focus on Trade
The CAD has managed to catch a bid over the last couple of days. This came as transit through the Strait of Hormuz fell and Iran threatened to step up attacks on shipping. Brent is over $100 per barrel, but the spread with WTI exceeds $10. WTI has lagged those gains. The CAD does seem to benefit from higher crude prices. However, the gains have been short-lived as crude prices remain volatile.
Canada posted a larger-than-expected merchandise trade surplus in August, which would otherwise have supported the currency. However, markets have mostly either ignored positive data or quickly reversed the resulting gains. That’s because a trade deal with the country’s largest partner, the US, remains elusive. Until the two countries resolve that situation, businesses show reluctance to invest in Canada. This keeps downward pressure on the currency.
Markets are also wary ahead of Alberta’s separation referendum. Polls suggest the oil-rich province will vote to remain part of Canada. However, markets could hedge a bit to avoid the geopolitical uncertainty.
What the Market Is Looking For
Canada will release its September jobs figures on Friday. The consensus is that the figures will effectively reverse August’s data. Economists project total full-time employment growth of 38K, compared to a decline of 36K a month earlier. They expect overall employment growth of 65K, compared to a decline of 42K a month earlier. Larger growth in the part-time segment could suggest that the labour market remains weak despite the positive turn. Economists expect the unemployment rate to tick up to 6.5% from 6.4%.
Markets see around a 75% chance that the BOC will raise rates by the end of the year. That compares with more than 80% for the Fed. If Canada’s jobs data beat expectations, the CAD could gain ground as yields rise on higher hopes of a hike. But another negative jobs print or an overshoot in the unemployment rate could push yields lower and weaken the CAD.
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