Canadian Jobs Data Underscore Likelihood of Rate Hike

Canada reported incredibly strong jobs data before the weekend. Canada grew 93.2k jobs, more than 4 times more than than market expected. It grew almost 50k full time jobs. These are impressive numbers and renews expectations that the Bank of Canada will raise rates when it meets again next week, even though there have been doubts in recent weeks about the trajectory of the world economy and the US economy in particular.

Canada created almost 233k jobs in Q2. Given that that US economy is roughly 10 times bigger it would be as if (proportionately) the US created a net 2.3 mln jobs. For the record, the US created 357k private sector jobs in Q2. In terms of full time jobs, Canada created 160k in Q2 after 47.5k in Q1 and 17.7k in Q4 09. Canada appears to be the first G7 country to completely recoup the jobs lost due the economic downturn.

Canada become the first G7 country to raise rates last month and uncertainty over the economic outlook saw the pendulum of market expectations swing away from aggressive tightening. The December Banker Acceptance futures contract rallied from 98.40 on June 21 to above 98.80 in the first part of last week. It retreated to 98.63 before the weekend in response to the jobs data and is consolidating above there today.

The overnight index swaps shows the market expects the Bank of Canada to tighten the most of the G7 over the next 12 months--112 bp currently priced in. In the short-term this is supportive of the Canadian dollar, but it also reveals a certain vulnerability. If negative news prevails and the slowing of the economic momentum turns more acute or the risk of a double dip escalate, the Canadian dollar is particular vulnerable to an unwinding of tightening expectations.

As the Canadian BAs rallied (rates eased) the Canadian dollar weakened. From June 21 through July 5, the US dollar rebounded from CAD1.0140 to CAD1.0680. The US dollar is trading quietly at the lower end of its pre-weekend range against the Canadian dollar. The CAD1.04 area poses important resistance for the greenback near-term.