Thoughts on Canada after the Disappointing Job Data

Canada's employment data were disappointing. Not only did it create few overall jobs than expected, but it lost 14.2k full-time jobs. However, it seems too hasty to conclude that the Bank of Canada will not hike rates in the June/July period as previously expected. Canada created 81k jobs in Q1, after about 21k in Q4 09, when the economy expanded by 5% (quarterly annualized pace).

Canadian short-term interests rates eased a few basis points and the Canadian dollar retreated after moving above parity. While this immediate market reaction is understandable, the larger arguments for a Canadian rate hike and a strong Canadian dollar remain intact.

As BOC Governor Carney as vocally pointed out, Canadian businesses do a generally poor job at capital investment and improving productivity. The consequence of this is that Canada experiences inflation typically earlier in the business cycle than the US. This is turn leads the central bank to raise rates. We continue to expect the BOC to hike rates before the Fed.

Canada already offers higher interest rates than the US. Consider that over the past month, while the US 2-year yield has risen 21 bp to 1.08%, Canada's 2-year yield has risen 33 bp to 1.84%.

The US dollar encounters resistance in the CAD1.0080-CAD1.10 area. It probably requires a break of CAD1.0140-80 to begin shaking out the CAD longs. On the other hand, reports suggest that good interest to hedge by Canadian businesses near parity. Since early Feb, the US dollar has fallen 7.5% against the Loonie,apparently discounting much good news. Near-term consolidation may be the most likely near-term scenario. If range trading does emerge, we are still more comfortable taking advantage of pullbacks in C$ to accumulate.