Posted on February 4, 2021 at 11:27 a.m. GMT Christina Parthenidou, XM Investment Research Desk
The loonie must not be moved to tears when Canada releases its first employment report of the year at 12:30 p.m. GMT on Friday as weaker numbers are inevitable given tough lockdown restrictions in January. The data is still worth watching, however, as the Bank of Canada (BoC) left two conflicting scenarios open during its previous policy meeting and investors are eager to gather new clues before making assumptions about the next policy announcement.
The BoC disappointed those who had expected micro-interest rates cut last month, keeping its borrowing costs constant at a record low of 0.25% and its asset purchases unchanged. Although the policy statement made it clear that interest rates at this effective floor will remain low until 2023, the case of lower but positive interest rates has not been completely ruled out. BoC chief Tiff Macklem judged that the virus history has a high level of uncertainty and the economy may need additional stimulus to weather negative shocks.
On the flip side, and perhaps more importantly, Macklem admitted that he was willing to gradually scale back asset purchases if the rebound takes hold. In particular, policymakers expect economic activity to warm up in the second quarter if the government lifts restrictions in the first quarter. It also shows that the outlook for Canada is now « stronger and safer » than it was in October, as vaccines are available sooner than expected and the massive stimulus unleashed. Indeed, the latest monthly GDP release was promising, showing slightly steeper expansion in November than analysts forecast, although ongoing curfews and delay in vaccine distribution over the coming months are likely to push GDP pressures back into negative territory will lower.
Friday’s January job report could provide a more timely look at the Canadian economy, likely reflecting the damage from recent stay-at-home orders. According to forecasts, employment declined at a somewhat slower pace of 47.5 thousand. Compared with the decline of 62.60 thousand in December, the unemployment rate rose by 0.2 percentage points to 8.9%.
A boring job market is a normal phenomenon during the embargo period. Hence, the above numbers cannot squeeze the loonie. Instead, the report could endorse the low-key part of the BoC’s latest policy statement, suggesting that prior restrictions on the wealth system could do more harm than good to the economy. However, investors can wisely wait for February employment numbers before drawing any final conclusions about the next central bank action on March 10th.
From a technical perspective, the loonie appears to be at a disadvantage against the dollar in the short term. Should USD / CAD secure a strong level around 1.2760, where the 23.6% Fibonacci is placed at 1.3389-1.2586, the pair may challenge the resistance zone at 1.2845-1.2907 again. A crucial close would raise hopes of a bullish market, especially if the price topped the 1.2955 high on December 21 as well.
If the pair pulls back below 1.2760, the 20-day simple moving average (SMA) may block the path towards 1.2680, where a breach could shed the spotlight on the crucial 1.2625-1.2586 support area.
Note that the U.S. non-farm payrolls will be released on Friday at the same time.