CAD: Setting up for employment (December) and international trade (November) - TDS

According to the research team at TDS, the simultaneous release of Canadian December employment and November international trade will be largely overshadowed by the competing US nonfarm payrolls report.

Key Quotes

“Emphasis will be on international trade and non-energy exports, which have been a persistent source of weakness in recent months.”

“International Trade: The international merchandise trade deficit is forecast to widen from $1.13bn to $1.90bn in November due to the combination of weaker energy export activity and higher imports. Exports will be heavily influenced by a pullback in oil prices leading into the November 30th OPEC meeting, though advance US trade data indicates that higher volumes may provide a partial offset. Auto exports should also contribute to the weak print given the recent plateau in US auto sales. There is scope, however, for overall non-energy exports to post a moderate increase after months of protracted weakness. Higher imports should reflect an increase in consumer goods imports due to the recovery in domestic retail activity while food and beverage imports should see a nominal gain driven by exchange rate passthrough. Thus, details showing gains in non-energy exports and imports would add a positive tone to the report, downplaying the headline weakness.”

“Employment: The Canadian labour market is expected to end 2016 on a softer footing relative to the sizeable gains over the last few months. TD forecasts job growth to slow to 5k in December, while a rebound in labour force participation should pressure the unemployment rate higher to 6.9%. The distribution of employment gains should skew towards the goods sector, which saw net job losses of 20k last month while service sector hiring should be subdued. We are also wary of a potential pullback in private employment which has enjoyed several months of steady gains relative to the public sector and those self-employed, although private-sector hiring has been tilted towards part-time workers. Lastly, we look for hours worked in goods-producing industries to take a steep dive due to a correction of last month's abnormal gain in agriculture. Service-producing industries could also see a retracement in hours worked, but we expect this to be more modest given the stronger underlying fundamentals.”

“Foreign Exchange: The foreign exchange market will be littered with event risk tomorrow, clouding the signal from local data releases. The tone of the greenback is likely to drive the major currencies, leaving CAD vulnerable to external drivers. A strong US report is likely to see the USD recover following the recent squeeze. The market response from the Fed minutes increases the impact of the US report on major currencies. Still, the best case scenario for CAD is a soft US report and an upside beat on the Canadian report. TD looks for a pickup of 5k, which translates into a 0.44 standard deviation surprise from the consensus. This is unlikely to provide much of a lift to CAD, owing to the fact that is trading nearly two standard deviations overvalued against the cyclical drivers we track. All told, we believe that the risk reward favors long USDCAD exposure into a packed event calendar with it likely to find support ahead of the trend line drawn off the April low.”