DB FX Daily: London Employment looms for USD/CA

[RTFX-Trading]

FX Daily: London
Employment looms for USD/CAD
Today's Key Data and Events
- DEU Industrial production for April, DB 0.8%/mkt 0.5% (10:00 GMT)
- CAD Employment for May DB 22k/mkt 14.3k (11:00 GMT)
- CAD Int. trade for May DB $C5.5bn/mkt $C4.8bn (12:30 GMT)
- USD Int. trade for May DB $62.0bn/mkt $63.5bn (12:30 GMT)

Upcoming Event Risks
- June 13: US retail sales for May
- June 13: BoC's Dodge speaks
- June 14: RBA's Stevens speaks
- June 14: SNB rate decision

Will Canadian employment data surprise again?
The day ahead sees the release of a range of data in Canada: employment; housing starts; and the international merchandise trade data. With expectations around the prospects for near-term tightening from the BoC having driven the move lower in USD/CAD, the employment report looms as the key risk event in Canada today.

After a 5.2k fall in employment in April (which followed a run of strong prints), the market consensus is for a relatively modest gain of 14.3k. We would argue that this is a `relatively modest gain' as the consensus forecast of +14.3k is comfortably below the 6-month, 12-month and 2-year average employment gains of 38k, 31k and 29k, respectively. We also note that when the consensus has been surprised on employment growth in Canada over the course of 2006 and 2007 to date the largest surprises have been on the upside. Such a pattern is consistent with what we would argue has been the broad under-appreciation (until most recently) of the resilience in the Canadian economy despite the slowdown in the United States.

While the moves lower in the BAX strip and USD/CAD have been significant, we remain of the view that the BoC will be tightening in both July and September - something not yet priced by the debt market. We also see the recent move higher in oil as supportive of USD/CAD weakness. Should today's data surprise on the downside (not our expectation) we would use any move higher in USD/CAD as an opportunity to re-establish short positions. Finally, with another employment report due in Canada before the July BoC meeting, we would not expect a significant re-assessment of prospects for near-term BoC tightening on the back of these data unless they surprise significantly to the downside.

US trade data continue to take a back seat
As the chart below on the right shows, US trade releases have waned in importance as a driver of EUR/USD volatility over the past few years. Indeed the moves in EUR/USD over the day on trade surprises show little clear pattern. We therefore expect today's trade data to have little lasting impact on FX markets.

Rather, with US equity markets having moved lower in the face of a surge in bond yields, and the VIX moving higher, we expect bond and equity markets to remain influential over the coming sessions