Canada: Economy will add another 5k jobs in February - TDS

Analysts at TDS note that despite the nearly 240k jobs added since August 2016, recent data has pointed towards a further improvement in sentiment among Canadian employers and they expect the economy will add another 5k jobs in February, which will extend the recent streak of employment growth but at a more moderate pace.

Key Quotes

“More importantly however, is that hours worked, which have dislocated from the trend in job growth, are expected to rebound after the sharp decline in January. This should help lend an upbeat tone to the report along with an anticipated outperformance in full time hiring. That said, wage growth among permanent employees — which decelerated to a historical low of 1.0% y/y in January — is likely to stay weak, as even an outsized monthly gain would leave the pace of gains near 1.0% y/y.”

“Job growth is expected to be driven by the goods producing sector while services will be weighed on by an anticipated pullback in finance and business administration. Our forecast for net job growth of 5k would leave the unemployment rate unchanged at 6.8%, though the risks are skewed towards an improvement to 6.7%.”

“Foreign Exchange

The FX market will have to grapple with the US and Canadian employment reports. This leaves USDCAD vulnerable to external drivers, in particular with the recent slump in oil prices. Our bias is to expect a strong US report, which is likely to drive the market response. A strong US report is liable to fuel further upside momentum in USDCAD since the market is likely to start rethinking the rate outlook for next year. The price actions come against a backdrop of an overextended positioning in CAD and also a shift in market expectations for the Fed. Indeed, USDCAD continues to trail the level implied by rate differential, suggesting more upside in the near-term.”

Our HFFV shows that USDCAD is close to fair value but under the hood, it also indicates that the 2y rate spread has the strongest statistical links with the pair. The key level to watch is 1.36, where a break of that opens up a new 1.36-1.40 trading range. Otherwise, failure to make a convincing break of the pivotal 1.36 level should provide buying opportunities for the pair soon.”