USD/CAD: what will the US and Canadian labor market data indicate?


Last Wednesday, after the publication of minutes from the June Fed meeting, the DXY dollar index broke through 107.00, and today DXY futures reached a new almost 20-year high of 107.61, while maintaining the potential for further growth. The breakdown of today's local maximum 107.61 and the next "round" mark 108.00 will be a signal to increase long positions in DXY futures with the prospect of growth towards multi-year highs of 121.29 and 129.05, reached, respectively, in June 2001 and November 1985.

DXY Chart

According to the minutes of the June FOMC meeting released on Wednesday, the Fed will raise rates by 50 or 75 basis points in July: high inflation justifies "restrictive" interest rates, with the possibility of a "more restrictive stance" if inflation stay at high levels.

But there is an alternative scenario: the official report of the US Department of Labor published today will be disappointing. In this case, the dollar may sharply, for the time being, fall, and market participants' doubts about the effectiveness of the Fed's actions may grow.

Despite the fact that Fed Chairman Jerome Powell recently (as part of a speech at the ECB Central Bank Forum in late June) reiterated that “the economy is strong” and will be able to withstand further tightening of monetary policy, the US central bank understands the growing inflationary risks, as well as the risks of worsening the situation on the labor market and in the country's economy. If today's report from the US labor market turns out to be frankly weak, then this may force the Fed leadership to “slow down” in their desire for a sharper increase in interest rates, and in the worst case, put this process on pause.

One can only guess about the reaction of the market to this, and it may turn out to be extremely negative for the dollar: new doubts about the success of the American economy may increase the outflow from American assets and, accordingly, the dollar.

Recall that the publication of the monthly report of the US Department of Labor with data for June is scheduled for 12:30 (GMT). It is expected that the US economy created 268 thousand new jobs in June (outside the agricultural sector of the economy), and unemployment remained at a pre-pandemic low of 3.6%, moreover, for the 4th month in a row.

The data shows continued improvement in the US labor market after its precipitous fall in the first half of 2020. Before the coronavirus, the US labor market remained strong, indicating the stability of the US economy and supporting the dollar quotes.

However, it is often difficult to predict the market reaction to the publication of indicators, because many indicators for previous periods are subject to revision. Now it will be even more difficult to do this, because. the economic situation in the United States and many other major economies remains controversial. In any case, when the data from the US labor market is published, a surge in volatility is expected in trading not only in USD, but throughout the financial market. Probably the most cautious investors will prefer to stay out of the market during this period of time.

FOMC member and head of the New York Fed John Williams will comment on this publication at 15:00: 

volatility in dollar quotes may rise again.

Also at 12:30 pm, Statistics Canada will publish data on the country's labor market for June. Unemployment has risen in Canada in recent months, including against the backdrop of massive business closures due to the coronavirus and layoffs. Unemployment rose from the usual 5.6% - 5.7% to 7.8% in March and already to 13.7% in May 2020. If unemployment continues to rise, the Canadian dollar will decline. If the data turns out to be better than the previous value, then the Canadian dollar will strengthen. Decreasing unemployment rate is a positive factor for CAD, rising unemployment is a negative factor. In May 2022, unemployment was at 5.1% (against 5.2% in April, 5.3% in March, 5.5% in February, 6.5% in January 2022). Forecast for June 2022: 5.1%.