The Canadian dollar may face increased selling pressures over the next 24 hours of trading as economists forecast employment to fall 35.0K in June, and fears of a protracted economic downturn could weigh on the exchange rate over the near-term as the central bank maintains a dovish outlook for future policy. At the same time, the International Monetary Fund raised its outlook for the world’s eighth largest economy, and projects economic activity to fall at an annual rate of 2.3% this year amid an initial forecast for a 2.5% drop in GDP, while the group expects the growth rate to expand 1.6% in 2010. However, a report by Statistics Canada showed the trade balance unexpectedly fell to -0.2B in April, driven by a 5.1% drop in exports, while retail spending plunged 0.8% in May as households faced a weakening labor market. Moreover, wholesale sales slipped for the seventh consecutive month in May, while the economy shrank for the ninth month in April, and businesses may continue to scale back on production and employment throughout the second half of the year as they face fading demands from home and abroad. As a result, the Bank of Canada is widely expected to hold the benchmark interest at the record-low of 0.25% throughout the first half of the following year, and may adopt policy tools beyond to interest rate to stimulate the ailing economy as the outlook for global growth remains weak. However, researchers at the central bank argued bond purchases by the BoC could ‘distort the capital and credit allocation process,’ and saw high uncertainties tied to ‘quantitative easing,’ which could hamper the prospects for a sustainable recovery. Meanwhile, Governor Mark Carney said that the ‘bank retains considerable flexibility in the conduct of monetary policy’ during June rate decision even as borrowing costs remain at a record-low, but went onto say that the recent appreciation in the Canadian dollar could ‘fully offset’ the pick-up in economic activity, which rises the risk of a protracted downturn. Moreover, the central bank head expects the economic recovery to be ‘more muted than usual’ and forecasts GDP to contract at an annual rate of 3.0% this year, and fears of a protracted downturn is likely to weigh on the exchange rate as investors weigh the outlook for future policy. However, a rise in market sentiment paired with higher oil prices could temper the reaction to a dismal employment report as risk trends continue to drive price action in the currency market.
Expectations for a 35.0K drop in employment favors a bearish forecast for the Canadian dollar but nevertheless, the jump in business spending paired with the rebound in housing starts has left the door open for an enhanced labor report. Therefore, if payrolls fall 20.0K or less in June, we will look for a red, five-minute candle subsequent to the release to confirm a sell-entry on two lots of USD/CAD. Once these conditions are met, we will place our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will establish our first target. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in an effort to preserve our profits.
On the other hand, the slump in global trade paired with rise in raw material prices may lead businesses to take further steps to lower their cost structure, and price action following the release could set the stage for a short Canadian dollar trade. As a result, an in-line print or a drop of more than 35.0K in employment would favor a bullish outlook for the USD/CAD, and we will follow the same setup for a long dollar-loonie trade as the short position mentioned above, just in reverse.
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