FX.co ★ USD/CAD. The loonie in anticipation of Friday's test

The Canadian dollar trades in a wide price range, which limits are marked with the levels of 1.3360-1.3460 (marks correspond to the lines Tenkan-sen and Kijun-sen on the D1 chart). During the entire week ,the pair alternately pushes back against the limits of this 100-point price range, and by and large, it makes no headway. If we look at the pair's weekly chart, we will see that the pair is within the framework of the upward pullback. Last week, the bears made a new near 3-months low (1.3261), but failed to consolidate within the range of the 32nd figure, amid strong US Nonfarm and increasing hawkish expectations of the Federal Reserve's next actions. However, the price growth stalled: traders are waiting for the "Canadian Nonfarm" to be released at the start of the U.S. trading session on Friday.

An important report for the Canadian currency

Typically, key U.S. and Canadian labor market data is released on the same day and even at the same time. The U.S. Nonfarm set the tone for all of the U.S. dollar pairs, while the Canadian figures are in the shadow: for obvious reasons, few traders are interested in them. In the context of the pair, the loonie follows the greenback, so the Canadian Nonfarm remains in the background compared to the more weighty U.S. report. But this month there was, so to speak, a "de-synchronization" with an interval of a week: the main labor market report in the US was released last Friday, while in Canada it will be released today, February 10. The U.S. report provided support for the bulls, while the Canadian figures could either strengthen the bullish sentiment or trigger a downward momentum. Either way, the loonie will only react to "its" numbers today, as the market has already effectively played back the US report.

Take note that preliminary forecasts do not promise a "bright future" for the Canadian dollar. Most likely, the report will be quite weak and that will put more pressure on the loonie, allowing the bulls to overcome the resistance level of 1.3520 (the middle line of the Bollinger Bands indicator on the weekly chart) and stay within the 35th figure.

Thus, the Canadian employment report is expected to rise by only 15,000 in January after a strong jump of 104,000 in December. That said, January's 15,000 gain will come mostly from an increase in part-time employment (+10,000), while the full-time component will show a more modest result (+5,000). The "headline" indicator of the report is also unlikely to impress traders: the unemployment rate should rise to 5.1%. In this case the growth is minimal, but a consistent downtrend was recorded during the last two months. The labor force participation rate is likely to fall in January, from 65.0% in December to 64.7%.

Possible effects of a weak report

At the end of the Bank of Canada's January meeting, the central bank increased the rate by 25 basis points, but actually announced a pause. Bank of Canada Governor Tiff Macklem said that further interest rate increase may not be necessary, because, according to the central bank's forecasts, "economic growth will slow down with a simultaneous decline in inflation". A little later, the governor outlined the central bank's decision in more straightforward terms, saying it was now time to pause to assess whether monetary policy was sufficiently restrictive.

In other words, Macklem confirmed rumors following its January meeting that the central bank intends to maintain a wait-and-see approach. Therefore, a weak labor market report will not play a decisive role in this matter (this issue has already been resolved).

However, now there are talks on a different plan - that the Bank of Canada may cut the rate in the second half of this year. The poll of market participants for 4 quarter published by the Canadian central bank on Monday showed that the median forecasts for the rate by the end of 2023 was 4%, i.e. rate reduction by 50 basis points is supposed. And while at the final press conference in January, Macklem said that "it is too early to talk about interest rate cuts," he did not actually rule out such a scenario (as, for example, the U.S. Federal Reserve did, de facto ruling out a rate cut in 2023). Therefore, weak Canadian labor market data may reinforce the market's dovish expectations regarding the Bank of Canada's future actions.

Conclusions

If the Canadian Nonfarm is in the red zone, bulls may attempt an upward breakout, overcoming the upper limit of the 1.3360-1.3460 range. The closest target will be 1.3520, which is the middle line of the Bollinger Bands on the weekly chart. In case Friday's report turns out to be in the green zone, then most likely, the pair will continue to trade within the aforementioned price range.