Where the Jobs Are!
Fundamentals
The "help wanted" signs were out in force in Canada last month, as June's employment report came in much better than had been forecast. Canadian employment rose by 93,200 jobs in June, which is nearly 5 times the pre-report estimate of approximately 20,000 jobs created. The large jobs increase followed a gain of 24,700 jobs in May and a record 108,700 jobs increase in April. The unemployment fell by 0.2% to 7.9%. The continued strong domestic employment picture has analysts looking for the Bank of Canada (BOC) to once again begin to raise interest rates. The previous rate hike occurred on June 1st when the BOC hiked its key lending rate by 0.25%. Traders now expect rates to move as high as 1.5 percent by the end of 2010, unless the shaky global economic recovery completely stalls out. The jobs report overshadowed a weaker than anticipated Canadian housing starts report for June, which came in at a seasonally adjusted annual pace of 189,300 units, down from the revised 195,300 units in May. The Canadian Dollar moved sharply higher vs. the U.S. Dollar after the employment report was released, as the expectation for higher interest rates in the near future put a bid into the "loonie". Also supportive to the Canadian Dollar was IMF's upward estimate for global GDP on Thursday, which came in 4.6% this year, vs. its previous estimate of 4.2%. The IMF expects Canada to be one of the leaders in economic growth among established nations, and recent economic data looks to confirm the IMF's beliefs. Since touching its yearly lows on May 25th at 0.9222, September Canadian Dollar futures have rallied over 600 pips before a recent test of the lows was halted near the 0.9360 level last week. Now that the up-trend once again appears in place, a test of the June highs near 0.9860 is not out of the question -- and neither is a potential move towards "par".
Trading Ideas
With the economic outlook looking bright for "our neighbors to the north", some traders looking to take a long position in the Canadian Dollar may want to explore bullish trading strategies using Canadian Dollar futures options. An example of such a trade would be purchasing a bull call spread. For example, a trader could buy a September Canadian Dollar 0.97 call and sell a September Canadian Dollar 1.01 call. With the September futures trading at 0.9679 as of this writing, this spread could be purchased for about 1.40 points, or $1,400 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $4,000 minus the premium paid which would be realized should the September Canadian Dollar futures be trading above 1.0100 at option expiration in September.
Technicals
Looking at the daily chart for September Canadian Dollar futures, we notice that since the middle of April, the market has made a series of higher lows and lower highs. We have what may turn out to be a head and shoulders bottom forming, with the right shoulder formed from the July 6 lows. Prices are now above the 20-day moving average, but bulls have run into resistance at the 100-day moving average, currently near the 0.9706 area. The next major resistance level is seen at the June 21st high of 0.9857, with major support found at the July 6th low of 0.9360.
Mike Zarembski Senior Commodity Analyst
