Employment Change (JUL) (07:00 EST; 11:00 GMT)
Expected: 20.0K
Previous: 34.8K

Unemployment Rate (JUL) (07:00 ET; 11:00 GMT)
Expected: 6.1%
Previous: 6.1%

How Will The Markets React?

Canadian employment conditions are expected to tighten further in July, as 20,000 workers are estimated to have been added to the labor force, which would keep the unemployment rate at a 33-year low of 6.1 percent. Since 2001, the Canadian economy has added about 1.9 million jobs, as companies earn record profits from exports of commodities such as energy and metals. Furthermore, the job growth has fueled homebuilding and consumption growth, forcing price pressures to build and leading the Bank of Canada to hike rates for the first time in over a year to 4.50 percent. After the rate announcement, the central bank’s policy statement was released and noted that risks remained roughly balanced, with the downside risks being related to the higher Canadian dollar and the ongoing adjustment in the U.S. housing sector while upside risks were derived from potentially stronger than expected household demand in Canada. While the balance could continue to remain steady as slowing exports to the US are offset by improvements in the labor market – which fuel consumption and housing growth – any pick up in inflation pressures could force the Bank of Canada’s hand as they saw that “some modest further increase in the overnight rate may be required to bring inflation back to the target over the medium term.” Given the importance of labor market conditions to the Bank of Canada’s rate outlook, traders should be aware of the data’s impact on Canadian financial markets. Furthermore, the actual figures rarely hit estimates spot-on, adding volatility to price action – particularly in the forex markets – upon release.

Bonds – 10-Year Canadian Government Bond Futures

Wednesday’s decline in 10-year Canadian government bond futures came right down to the ascending trendline at 110.78 and managed to recover somewhat into the close. On Thursday, price action pushed up into the daily swing point resistance at 111.42, with a close above there possibly seeing follow through towards new highs for the contract. The US subprime issue will likely provide a supportive backdrop, however, a jump in the net employment change on Friday could help lead CGBs lower as it could raise the probabilities of further policy tightening by the Bank of Canada. On the other hand, a surprisingly weak result would only perpetuate the rally in CGBs, as traders appear to remain risk averse market-wide.

FX – USD/CAD

The Canadian dollar suffered big losses against the US dollar on Thursday, as the greenback garnered significant strength against the majors – with the exception of the Japanese yen – as risk aversion in the markets spiked. Furthermore, the USDCAD bounce from support at the 61.8% fib of 1.0339 – 1.0699 at 1.0477 indicates that the pair could be making headway to the 1.0700 level once again, as Elliot Wave patterns favor a move higher. However, the release of Canadian employment data could throw a kink into this move, as labor market conditions are anticipated to tighten once again. The key to trading the data is realizing that USDCAD tends to respond to the actual net employment change relative to the expected figure, rather than the figure from the month prior. Moreover, the actual reading of the indicator rarely hits estimates spot-on, so the event tends to provide a surprise factor for USDCAD traders. Thus, if the net employment change is actually stronger than forecasts, USDCAD could fall to test 1.0477 once again. On the other hand, if the data shows that there were fewer workers added to the workforce than expected, or worse, if there was a contraction in the labor supply, USDCAD would likely surge towards near-term resistance at 1.0600 as the figures would be highly bearish for the Canadian dollar.

Equities – S&P/TSX Composite Index

Canadian financial shares fell the most in five years, leading a 280.18 point decline to 13,478.01 in the S&P/TSX Composite Index on renewed concern that a credit crisis is spreading. Equity markets in the US and Europe also plummeted after France's biggest bank, BNP Paribas, halted withdrawals from three funds, prompting central-banks in Canada, the US, the UK, the and the Euro-zone to pump liquidity into the market, bringing credit worries back to the forefront. The S&P/TSX is nearing support, however, at the 61.8% fib of 12,661 – 14,647 at 13,420 as well as the 200 SMA near 13,300. While the release of Canadian employment data could tip the benchmark equity index lower, as a strong improvement would lead the markets to ramp up speculation of another hike by the Bank of Canada, it will likely be global risk aversion trends that will drive the S&P/TSX. Thus, traders should pay heed to the news on the wires, as another dismal day in European equities may precede another plunge in Canadian stocks.

Terri Belkas is a Currency Strategist at FXCM.