USD/CAD Rises on Strong U.S. Jobs and Services Data

07/06/2023

2 minutes read

2023.07.06 17:15

ADP employment surprises with a huge gain of 497,000
On Friday, US releases nonfarm payrolls and Canada publishes the employment report
Nonfarm payrolls are expected to fall to 225,000, Canada projected to add 20,000 jobs

The Canadian dollar is in negative territory on Thursday. In the North American session, is trading at 1.3370, up 0.70%. The Canadian dollar has slipped almost 1% since Wednesday.

ADP employment shows a massive gain

After the Fed minutes on Wednesday, the markets were awaiting the on Friday. The employment report, which precedes nonfarm payrolls, often gets no more than a cursory glance as it’s not considered a reliable precursor to the NFP. Thursday’s release, however, was simply too large to ignore. The ADP reported a gain of 497,000 in June, up from 267,000 in May and well above the consensus of 228,000.

US nonfarm payrolls are expected to move in the opposite direction of the ADP report, with a consensus of 225,000 in June, down sharply from 339,000 in May. After today’s ADP shocker, Fed policy makers will be hoping that nonfarm payrolls decline as expected. If nonfarm payrolls follow the ADP lead and climb sharply higher, the Fed may be forced to raise rates more than expected in the second half of the year to cool the hot labour market.

The money markets have repriced rate expectations for July following the ADP release. The probability of a 0.25% hike is currently at 94%, up from 86% prior to the ADP report. Fed Chair Powell has hinted at one more rate hike after July, but a September hike will be more likely if nonfarm payrolls rise on Friday.

The ADP report grabbed all the headlines, but other employment numbers on Thursday could indicate that the labour market is slowly weakening. Unemployment claims rose from 236,000 to 238,000, higher than the consensus estimate of 245,000. As well, Jobs Openings fell from 10.32 million to 9.82 million, shy of the consensus estimate of 9.93 million.

The ISM Services PMI may be another headache for the Fed, as it jumped in June to 53.9, well above the May reading of 50.2 and the consensus estimate of 51.2 points. The report indicates that business activity is expanding and the economy remains strong, despite the Fed’s aggressive tightening cycle.

Canada releases the June employment report on Friday. The economy is expected to rebound with 20,000 new jobs in June, after a loss of 17.3 thousand in May. The unemployment rate is projected to rise to 5.3% in June, up from 5.2% in May.