Net Employment Change (DEC) (12:00 GMT; 07:00 EST)
Expected: 15.0K
Previous: 42.6K

Unemployment Rate (DEC) (12:00 GMT; 07:00 EST)
Expected: 5.9%
Previous: 5.9%

What Are The Markets Facing?

Canadian economic conditions were rather resilient throughout 2007, though the strength of the Canadian dollar started to show through in the deteriorating of trade and manufacturing reports towards the end of the year. Indeed, Ivey PMI plummeted below the 50 boom/bust level to a six-year low of 45.9, signaling contraction in the business sector. A breakdown of the report showed there was not a promising number to be had, as inventories plunged 10 points to 42.9 and supplier deliveries dropped to a surprising 39.0. Meanwhile, employment plunged 14.2 points to its first net negative number in many months, which does not bode well for the December employment report. The Canadian labor market is expected to have added a net 15,000 workers during December, which would keep the unemployment rate at 5.9 percent. While the unemployment rate has actually risen in recent months, this is only because more people have come back into the market to look for work, raising the participation rate. The release of the net employment change tends to be quite market-moving, particularly when it comes to FX, as the actual figure rarely meets economists’ estimates. Over the past few months, the surprise has generally been to the upside, which has proven to be bullish for the Canadian dollar. However, given the sharp drop we saw in Ivey PMI, the December labor market readings could be quite disappointing and may lead traders to ramp up speculation that the Bank of Canada will cut rates on January 22.

Bonds – 10-Year Canadian Government Bond Futures

While Canadian Government Bond futures have steadily climbed up towards the 116.50 level, the rally appears to be losing steam. While price action in the equity markets may determine the next move for the contract on Thursday, event risk on Friday could shake things up. Canadian labor market data tends to be very market-moving for the FX markets, but a surprising release could spark volatility in CGBs as well, with an unexpectedly strong employment change figure likely to weigh the contract down further. On the other hand, dismal Ivey PMI reports suggest some potential for a disappointing job report, which could push CGBs up for a test or break above 116.50.

FX – USD/CAD

Thus far, USD/CAD has managed to hold below trendline resistance near 1.0115, as the greenback’s strength against the Loonie has died down. Friday’s Canadian event risk could propel a move to either the upside or downside, as labor market reports from the country tend to be highly market-moving, mostly because they often deviate far from expectations. According to Bloomberg News, economists estimate the labor market added 15,000 workers in December. However, dismal Ivey PMI readings indicate some potential for a disappointing figure on Friday, which would propel USD/CAD towards 1.0250. On the other hand, a strong reading could weigh USD/CAD down below parity, which is in line with COT positioning and SSI, which are still in favor of further USD/CAD declines.

Equities – S&P/TSX Composite Index

The S&P/TSX Composite Index has bounced from support at the 13,500 level, but the double top at 14,000 still leaves the index looking bearish. The release of Canadian labor market data could help determine the index’s next move, though global stock market trends will likely be the predominant driver. Nevertheless, if the net employment change proves to be much weaker than expected, the S&P/TSX could be weighed down towards or below 13,500. On the other hand, a much better than forecasted released could prop shares up, as the markets judge that consumption growth will keep the Canadian economy on track.

Terri Belkas is a Currency Strategist at FXCM.