April 4 CAD Net Employment Change (MAR) (11:00 GMT; 07:00 EDT)
Expected: 15.0K
Previous: 43.3K

Unemployment Rate (MAR) (11:00 GMT; 07:00 EDT)
Expected: 5.8%
Previous: 5.8%

What Are the Markets Facing?

While the Canadian credit markets remain very tight and the Bank of Canada is expected to continue cutting rates, economic conditions in the first quarter of 2008 have actually proven to be rather resilient. Indeed, retail sales and business activity have rebounded from very weak levels in December as domestic demand remains robust. Why? Healthy labor markets. The Canadian economy is expected to have added a net 15,000 workers during March, which would keep the unemployment rate at 5.8 percent. 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 especially bullish for the Canadian dollar. Furthermore, traders will be watching the employment report as a leading indicator for Ivey PMI at 10:00 EDT, as a large shift in the former may suggest a similar move in the PMI release. Nevertheless, with the financial markets remaining unstable, the Bank of Canada is likely to continue following the Federal Reserve’s lead by cutting rates on April 22 regardless of how optimistic this employment data appears.

Bonds – 10-Year Canadian Government Bond Futures

The descent of Canadian government bonds has run into heavy support at the 117.60/118 level, and while Friday’s labor market data out of Canada tends to be a big market-mover for CGB’s, the contract may not be able to break much lower. On the other hand, a surprisingly weak employment report (like we saw in December) could lead CGBs to spike higher towards near-term resistance at 118.40.

FX – USD/CAD

While most traders in the forex markets will be awaiting Friday’s US non-farm payrolls numbers, there’s another labor market report to watch first: the Canadian net employment change at 7:00 EDT. This release is essentially “the other NFP” report, as the data tends to be highly market-moving for the Canadian dollar and rarely meets estimates. Lately, the net employment change has proven to be much better than forecasts and tends to lead the USD/CAD pair to plunge sharply in the minutes after the news hits the wires. However, follow-through during the rest of the day tends to be limited. If the net employment change proves to be better-than-expected, USD/CAD is likely to drop down toward parity, though sharper declines may target the confluence of an ascending trendline and the 61.8 percent fib of 0.9709 – 1.0325 at 0.9945/50. On the other hand, a disappointing figure could lead the pair to rebound toward 1.01.

Equities – S&P/TSX Composite Index

The S&P/TSX Composite Index remains just as vulnerable to sharp declines as US stocks, as financial market instability and tight credit conditions linger. While it is not uncommon for the S&P/TSX to break through the 200 SMA, the index may have difficulty doing so this time around as Fibonacci resistance at 13,550 has put a cap on additional gains. Nevertheless, the S&P/TSX could make an intraday test 13,670 if Friday’s employment data proves to be stronger than expected. However, risk trends in the market will ultimately decide the index’s next move, so traders should keep an eye on carry trades for signs that flight-to-safety is taking hold once again.

Terri Belkas is a Currency Strategist at FXCM.