Economists at TD Securities look for the Canadian labour market to give back much of last month's strong job gains. While much of this look down to temporary and technical factors, they also note that USD/CAD looks oversold on a range of measures. That could see the pair squeeze higher – but they are biased to fade such a move as the broader narrative around Canada’s recovery should remain intact.
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“We think the return of lockdown measures drive a sharp (-175K) pullback in total employment for April with services again taking most of the hit. This should push the unemployment rate back to 8.0% from last month's 7.5% reading. Within this, we see risks tilted towards a larger deterioration as the latest lockdown restrictions were implemented more decisively than in previous episodes. A partial unwind of recent job growth should not come as a great surprise to the market, but the magnitude of the reversal may give some investors pause after a solid run lower in USD/CAD.”
“The latest drop has put the pair well into 'oversold' territory on both the daily and weekly-RSIs. At the same time, we are also not too far away from that on a monthly basis (33.4 currently) as well. If our expectation for a weaker CAD report is confirmed, we think this could offer the market an excuse for a squeeze higher if it wants one — at least for now. That said, we suspect such a squeeze may prove to be temporary.”
“The 1.2250 threshold is likely to be the first area of focus. Ability to push higher through there may depend more on the US outcome than anything else today. Above that, the 1.2365 breakdown level becomes the next natural attractor to the upside, but we think that looks rather far away right now.”
“An unexpectedly strong reading in Canada (or weak US) would refocus our attention on a test of 1.2062.”