Just a word of warning about this afternoon’s CAD labour market data. Given that markets are trading in a risk-off mood already today and the loonie has continually failed to break the 1.349 level, the risks to a further loonie sell-off are heightened.
While expectations sit at a 700K rise in employment and a reduction in the unemployment rate from 13.7% to 12.1%, it must be noted that last month’s employment gain still resulted in a rise in the unemployment rate due to the number of workers re-entering the workforce. With the participation rate still some distance from pre-virus levels and the CERB scheme set to end in October, workers may begin to filter back into the labour market at a faster rate, meaning the unemployment rate might struggle to rebound with the same vigour as the net employment change data. While markets focused on the net employment change last time around, the loonie rallied 0.15% in the 5 minutes after the release while the 2Y yield rose 2.2bp, the same might not occur this time around. (note the USD broadly softened in the 5 minutes after the 13:30 BST release with NFP also released at the same time last month.)
Additionally, following the backlash to Morneau’s fiscal snapshot on Wednesday, we believe fiscal policy is likely to be more constrained in 20H2, with the threshold to further stimulus to support the labour market raised.
The emphasis has seemingly shifted towards getting workers back into the workplace with the top-up in the CERW scheme, which is aimed to reduce the scarring inflicted on the labour market, but how much this is going to drive the re-employment drive is yet to be seen. Today’s release is the first piece of data markets will receive since the scaling back of broad lock-down measures nationally, hence the elevated importance of the print.
With all of these dynamics in play, we believe the risks are skewed to an extended loonie sell-off following the labour market data release, although the upper bound of its recent range (1.37157) would only be tested given a catastrophic labour market release, which in our opinion remains a tail risk given the broad economic recovery seen in Canada’s June data.
Participation rate may overpower the net employment change, leading to a sluggish or counterintuitive unemployment rate reading
USDCAD leading up to the release
Author: Simon Harvey, FX Market Analyst