The Canadian dollar is gaining some ground against the US dollar with weak momentum as investors are waiting for February’s employment report on Friday at 13:30 GMT. It’s noteworthy that the currency is moving slightly up despite policymakers indicating at Wednesday’s monetary policy meeting that the labor market is a long way from recovery, with employment still well below pre-coronavirus levels.
A reduction in unemployment is forecasted
In the previous release, the unemployment rate in Canada increased to 9.4% in January, the highest since August. The consensus for February is for the unemployment rate is to fall to 9.2%, while the economy is expected to have added 75K jobs following a contraction of 212.8K jobs in January. There could be some gains ahead for the loonie if wage growth and employment numbers show further improvement in the labor market.
Moreover, in terms of the coronavirus pandemic, in Canada, 3.8 million vaccine doses have been delivered to date and in the next few weeks more than a million doses will arrive, as Canada has entered the much-anticipated ramp-up phase in the national mass immunization campaign. The vaccination could recover the economy faster and take the loonie even higher.
BoC leaves monetary policy steady
As widely anticipated, the Bank of Canada (BoC) left all monetary policy measures unchanged on Wednesday. Policymakers were more upbeat about the economic developments and the policy rate will remain steady at 0.25% until the inflation target of 2% is achieved. The central bank will continue its quantitative easing program, but the loonie traded higher as the statement was laced with optimism. Despite the stronger near-term outlook, there is still economic slack even with GDP growth in the first quarter of 2021 predicted to be positive. CPI is likely to move around the 1-3% target band in the next few months, reflecting base-year effects in some goods and services at the outset of the crisis a year ago.
Dollar/loonie plummets in broader outlook
Turning to market reaction, the Canadian dollar has been gaining some considerable ground against the US dollar over the last year, helping USDCAD to touch a three-year low of 1.2467. However, a stronger-than-predicted jobs report on Friday could drive USDCAD lower to test the immediate support at 1.2525, registered in April 2018 ahead of the 1.2467 trough. Steeper decreases could send the market until the 1.2250 support, being the low from January 2018.
Alternatively, if the employment report shows slowing and/or the unemployment rate increasing, the pair could return to the 1.2750 immediate resistance, while more advances could revisit the 1.2880-1.2950 area, breaking the downtrend line to the upside. If buying interest persists the 23.6% Fibonacci retracement level of the down leg from 1.4668 to 1.2467 at 1.2990 could come in focus.
For the Canadian dollar to move strongly higher, investors will probably want to see more evidence that there is a sustained recovery and whether additional stimulus is on the cards, not just in Canada but also in its largest trading partner, the United States.
