The Canadian dollar depreciated versus the U.S. dollar ahead of the release of the U.S. non farm payrolls (NFP) report. The USD advanced across the board as the probability of a rate hike in December rose to over 60 percent. The Canadian dollar did not fall further thanks to the advance of the price of oil that is still rallying after the news of an Organization of the Petroleum Exporting Countries (OPEC) production cut agreement last week.
The Canadian currency is bracing itself for a strong NFP report and a more subdued showing from the statistics Canada job numbers. The loonie has decoupled from the price of energy and is now showing a higher correlation to interest rate expectations. The lack of traction in the Canadian economy despite two rate cuts by the Bank of Canada (BoC) in 2015 and a fiscal stimulus package by the government in March of this year means that both will have to go back to the drawing board to spark a recovery. The BoC is not expected to cut rates this year, specially if the Fed hikes rates widening the interest rate differential but would be in a tough spot if the Fed is forced by an underperforming U.S. economy to stand pat for all of 2016.
U.S. employment data has been positive all week. The ADP private payrolls added 154,000 jobs around 12,000 less than expected in September. The miss was not massive enough to warrant USD weakness and was balanced against a strong ISM non-manufacturing PMI that posted a 57.1 reading. The strong rebound in the non-manufacturing sectors was across the board as nearly all subcomponents showed an increase with the employment component rising 6.5 points which could signal a positive U.S. non farm payrolls (NFP) number.The USD/CAD gained 0.259 percent in the last 24 hours. The pair is trading at 1.3210 ahead of tomorrow’s U.S. jobs report. The Canadian jobs report is expected to add around 5,000 jobs while the NFP is forecasted to add 160,000 jobs and continue a strong trend in employment.
BoC Senior Deputy Governor Carolyn Wilkins spoke in Quebec earlier today and delivered a dovish outlook for the economy. Citing a complex adjustment away from natural resources made harder by the reality of an aging population as factors of a slowdown in economic growth. The central bank is not expected to cut rates in two weeks, but it seems the dovish rhetoric will be sustained during the release of the statement.The price of crude gained 1.57 percent in the last 24 hours. West Texas is trading at $50.14, the first time since the Brexit vote that crude has been above the $50 price line. The OPEC production cut deal combined with consecutive drawdowns of U.S. inventories have boosted the price of crude after a horrible start for producers in 2016.
The agreement in Algiers surprised the market not only for OPEC being able to be on the same page on something but also for making a meaningful try at stabilizing prices by offering a production cut instead of the expected oil output freeze. The details of the Algiers agreement still needs to be communicated and as the Algerian Energy Minister Nouredine Bouterfa said today there might be even more cuts on the table. The news boosted the price of energy across the board, despite the USD rising ahead of the NFP report.
CAD traders will be on the lookout for the two employment reports released tomorrow. The NFP will grab the most attention as it could hold more insights into the rate path of the U.S. Federal Reserve in December. The headline number has lost some priority as the actual number of jobs is not seen as important as how wages have changed. Inflation data points are paramount for the Fed as it prepares for a much-awaited decision to deliver the first U.S. interest rate hike of 2016… in the final month of the year.
Market events to watch this week:
Thursday, October 6
8:30am USD Unemployment Claims
Friday, October 7
8:30am CAD Employment Change
8:30am CAD Unemployment Rate
8:30am USD Average Hourly Earnings m/m
8:30am USD Non-Farm Employment Change
8:30am USD Unemployment Rate
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
About Alfonso Esparza
Senior Currency Strategist, OANDA, Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he 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 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. Follow on Twitterand on his Google+ profile.