Article by AlgosysFx Forex Trading Solutions
Increased prospects for additional easing from the Federal Reserve are presumed to continue weighing on the US dollar opposite its Canadian counterpart after jobs growth in the world’s largest economy slowed considerably in August. In contrast, the Canadian jobs engine powered along during the same month, seemingly reinforcing Bank of Canada Governor Mark Carney’s hawkish stance on monetary policy.
In a report that largely underscored the weakening state of the US economy, the US Labor Department disclosed that American employers added only 96,000 jobs in August, well below expectations of a 123,000 count and lower than the 141,000 rise recorded in July. The Jobless Rate did decline from 8.3 percent to 8.1 percent, but that was because 368,000 discouraged Americans left the labor force. In addition, the participation rate, which indicates the share of working-age individuals in the labor force, fell to its lowest level since September 1981. At its last meeting, the Fed’s FOMC said additional stimulus would be warranted unless a substantial and sustainable strengthening of the economy begins. Last month, Fed Chairman Ben Bernanke seemingly laid out the groundwork for further action as he called unemployment a grave concern. Economists say that the soft jobs report was likely enough to convince the Fed that a looser monetary policy was needed to breathe more life into an economy. Hence, with a third round of bond purchases seemingly on the cards in this week’s Fed policy meeting, demand for the Greenback is apt to decline.
Conversely, the Canadian labor market is showing encouraging signs of strength. The Canadian economy added 34,300 jobs in August, managing to recover all the 30,400 lost positions in July and well exceeding estimates of a 9,900 gain. The Unemployment Rate remained at 7.3 percent as more Canadian searched for jobs during the month. While analysts warn that the strength of the report is unlikely to sway the BOC to raise interest rates soon given the slowdown in the US, it still supports Governor Carney’s predisposition to withdraw stimulus should conditions warrant them.
Meanwhile, the Royal Bank of Canada projects the Canadian economy to grow by a relatively strong 2.1 percent this year as accommodative monetary policy, continued business spending, bettering labor market conditions and an improving trade balance are likely to support growth. It also predicts that the lingering downside risks are apt to diminish in the months ahead, clearing the way for the BOC to gradually hike rates next year. Amid this outlook, the Loonie is apt to be supported. As such, a short position is advised for the USD/CAD today.
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