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The loonie is set to fly

The loonie is set to fly

Jobs, jobs, and more jobs

DXY 1.2372
Week ahead bias
Mildly Bullish
Weekly range
1.2260 – 1.2430
1 month target
  • Canada added 231,000 jobs in June, which was significantly above the 175,000 consensus. The only disappointing news was that they were all part-time with full-time employment falling 33,200. This shift is likely a result of ongoing Covid restrictions and the gradual re-opening process. Put together, the data shows that the economy is getting close to having fully recovered all the lost jobs caused by the pandemic.
  • Current employment is now down only 340,000 from February 2020 levels and the gradual re-opening of the economy is set to gain more momentum in the next couple of months, analysts expect employment to be fully recovered by the end of the current quarter.

BoC is likely to taper again

  • 40% of Canada’s population is now fully vaccinated with a further 29% of the population already administered a first dose leaves Canada well ahead of the US and most of Europe and puts Canada at or near the top of the Covid vaccination rankings.
  • In any case, Canada’s economy hasn’t been hit as hard as feared by the third wave of infections while the BoC’s latest Business Outlook Survey showed sentiment hitting a record high on optimism that the economy can swiftly return to normality. With fiscal policy continuing to provide support to the economy, inflation already above target and jobs prospects looking strong the Bank of Canada is likely to announce a third taper of its QE asset buying this week, reducing it to C$2bn per week from C$3bn.
  • Most expect the BoC to become more and more hawkish with a gradual hardening in the coming months with the expectations of interest rate hikes twice in the second half of 2022 and risks skewed towards even earlier policy tightening.

Looks like the low 1.20’s are in the cards

  • The strong jobs data for June likely fueled expectations that the BoC will taper asset purchases again at the July meeting. Another round of tapering can have a meaningful positive impact on CAD next week after the recent weakness over the last few weeks.
  • What the June jobs report also did was to provide evidence that the set of grim data for Canada caused by the spring flare-up in Covid-19 cases is past us, and that the economy is indeed back on an encouraging growth path.
  • Market sentiment suggests that the CAD should enjoy a sustained recovery to the 1.20 level in 3Q and a move below 1.20 in 4Q. That said, a key risk to this profile is surely related to a potential fully-fledged break-up in the OPEC+ deals.

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