USD/CAD Canadian Dollar Lower After Monster US NFP Gain

The Canadian dollar was weak on Friday after the release of the U.S. non farm payrolls (NFP) and the disappointment of Canadian job data. The U.S. added an impressive 287,000 jobs after the let down in May. There was a further downward revision to the already horrible May data which ended up gaining only 11,000 jobs. The U.S. unemployment rate rose to 4.9 percent with labor participation rising to 62.7 percent. The biggest positive from the NFP report was the year over year gain of 2.6 percent of American wages, matching the fastest growth since the credit crisis. The Canadian Labour Force survey shows a drop in unemployment to 6.8 percent even as the economy lost 700 jobs this month. The lower unemployment rate is explained by a drop in the participation rate to a 16 year low of 65.5 percent.

The Canadian Purchasing Managers Index (PMI) beat forecasts yesterday with a 51.7 reading. Last month the index had fallen into contraction territory with a 49.4 print, so this month’s data point add a bit of good news to the Canadian Economic outlook. Macro headwinds have hit hard and fast since the beginning of the year. The shock of Brexit still lingers and Canada’s reliance on natural resources has hurt growth expectations as prices tumble as risk aversion and ample supply are present.

Overall this has been a strong week for U.S. employment and that has boosted the USD across the board. The Brexit vote has limited the upside as the USD did not have the same reaction that would have been expected in the pre-referendum world. The U.S. Federal Reserve would have been pleased by this week’s data with a rate hike in July a possibility with higher chance of a September monetary policy action. In the new Post-Brexit economic environment a monster NFP is not a game changer, but it still validates the USD as a safe haven in times of market anxiety.

The USD/CAD gained 0.967 percent in the last 24 hours. The pair is trading at 1.3070 after the massive U.S. employment number was reported by the Bureau of Labor Statistics at the same time as Canadian jobs data was released. The diverging stories told by both reports was expected as the U.S. had a terrible May report from which a bounce back was expected, while Canada impressed in May but the optimism of that release was premature.

The Canadian economy is still reeling from low commodity prices and the added risk aversion triggered by Brexit while helping depreciating the loonie has not boosted exports as much as the Bank of Canada (BoC) forecasted. The lower labour force participation and high house hold debt continue to be a concern for the central bank. This week the Canadian banking regulator Office of the Superintendent of Financial Institutions (OSFI) introduced tougher rules for mortgage lending in an effort to curb rising prices fuelled by low interest rates. Analysts don’t believe the change will make a big impact as Canadian benchmark rates are a record low and could go even lower as negative rates are an option for the BoC as it awaits the impact of the government’s fiscal stimulus plan before it tries to boost the economy via monetary policy.

Next week the Bank of Canada (BoC) will take center state. The BoC will publish its rate statement and monetary policy repot on Wednesday, July 13 at 10:00 am. The central bank is not expected to announce a change to its benchmark rate and the market will be focused on the statement and the press conference with Governor Stephen Poloz at 11:15 am EDT to get insights into how the BoC is facing the rising macro headwinds that have hit the Canadian economy.

CAD events to watch this week:

Monday, July 11
8:15am CAD Housing Starts
Wednesday, July 13
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
11:15am CAD BOC Press Conference
Thursday, July 14
8:30am CAD NHPI m/m
Friday, July 15
8:30am CAD Manufacturing Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency
trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza