Canadian Dollar on a Roll Ahead of U.S., Canada Job Reports

07/07/2023

2 minutes read

2023.07.07 05:35

US nonfarm payrolls expected to drop, but massive ADP jobs report is making investors nervous
Canada’s labour market is expected to rebound with a 20,000 gain

The Canadian dollar is drifting in the European session, trading at 1.3378.

It has been a good week for the Canadian currency, which is up about 1% against its US cousin. We can expect some significant movement from in the North American session, as both Canada and the US release the June employment reports.

Will nonfarm payrolls follow the ADP and soar?

The US labour market has been surprisingly resilient in the wake of relentless tightening by the Fed. After 500 basis points of hikes, the labour market remains strong and has been a driver of inflation, interfering with the Fed’s efforts to curb inflation.

The ADP employment report usually doesn’t get much attention, as it is not considered a reliable precursor to nonfarm payrolls, which follows a day or two after the ADP release. The June ADP reading was an exception, as the massive upturn couldn’t be ignored. ADP showed a gain of some 497,000 new jobs, crushing the consensus estimate of 267,000 and the May reading of 228,000. The nonfarm payrolls report is expected to ease to 225,000 in June, down from 339,000 in May, but investors are nervous that nonfarm payrolls could follow the ADP release and head higher.

If nonfarm payrolls defies the consensus estimate and climbs higher, the US dollar should respond with gains. The Fed, which is very much hoping that the labour market weakens, would be forced to consider more tightening than it had anticipated. The money markets are widely expecting a rate hike on July 27th but have priced in a September pause at 67%, according to the CME FedWatch tool. If nonfarm payrolls jump higher, all bets are off and I would expect the probability of a September pause to fall.

Canada releases the June report later on Friday, which is usually overshadowed by US nonfarm payrolls. As in the US, the Canadian labour market has been strong – the economy added jobs for nine consecutive months until the May report. Canada is expected to add 20,000 new jobs in June, while the unemployment rate is projected to inch higher to 5.3% in June, up from 5.2% in May.

USD/CAD Daily Chart