Week in FX – U.S and Canada Moving in Opposite Directions

Friday delivered a nonfarm payrolls (NFP) report that blew away the critics, conspiracy theorists, and jittery investors in one fell swoop. U.S. employers ramped up hiring in November, continuing a stretch of robust payroll gains, putting the U.S. firmly on pace to record its strongest job gains in 15 years.

The NFP headline print of +321k (expected +221k), and an unemployment rate of +5.8% (the lowest level in six years), was the strongest month reported in nearly three years. The solid, broad-based monthly gain, combined with positive revisions (+44k for September and October), and an uptick in hourly earnings (November +2.1%, year-over-year), has thrown the cat among the pigeons. The mighty dollar has gone walkabout across the board, becoming a firm favorite for investors, while U.S. bonds have been hit hard (yields rising — two years at +0.6%, 10’s at +2.305%). If this particular monthly gain becomes a trend, the capital markets will have to begin pricing in a Federal Reserve rate hike sooner rather than later. For now, American unemployment remains too high, and inflation too low.

Providing support for the feel-good U.S. story is gross domestic product data. It has grown at an annual rate of +3.9% in the third quarter seasonally adjusted, just below the stellar +4.6% in the second quarter, and well above the surprise contraction reported in the first quarter of this year. However, many are predicting that growth slowed in the current quarter, down to a forecast +2.1%-2.4%.

No matter what, the American economy remains the torchbearer and the true bright spot among global economies. Japan and the eurozone continue to battle the evils of deflation; China has its own growth and liquidity concerns; and the U.K. is grappling with the Bank of England’s dovish rhetoric. Long-term directional plays will continue to depend on how the developed economies’ central banks intend to handle things in medium term. This week, the European Central Bank was as coy as ever. Investors must now wait until January to see what Mario Draghi and company will finally table. Meantime, December’s 16-17 Federal Open Market Committee meet should be interesting: the American inflation and employment story will not change, but the markets will be listening for any loose lipped remarks for some year-end inspiration.

Canada Takes the Wrong Route

On the surface, Canada’s employment situation looks pretty dismal when compared to its largest trading partner, the U.S. The commodity-sensitive economy managed to record a surprising job loss headline for November (-10.7k versus expected +5k), and enough to raise the unemployment rate a tick to +6.6%. Nevertheless, looking at the six-month pace, the trend still tracks slightly above +21k. In U.S. terms, that’s the equivalent of +210k jobs each month for an economy that currently has a tenth of the American population.

Last month’s decline was driven by services (-28k), while manufacturing added jobs (+17k). The full-/part-time split were favorable, with full-time adding +5.7k new jobs; while part-time shed -16.3k. Not horrid numbers, but certainly a headline print that has managed to keep the loonie under some outright pressure (CAD$1.1437).

Other Canada data not so comforting

Canada’s trade surplus in October narrowed ($99.14m vs. $307m, m/m) more than expected as imports (+0.5%, m/m) out-paced exports (+0.1%) due to increased shipments from the U.S and China. More of a concern was the previous months print being revised sharply lower.

Also a tad concerning was Canada’s labor productivity (output per hour worked), it slowed substantially in Q3, rising just +0.1% following a +2% increase in the preceding three-month period.

The market will now begin to string out for the remainder of this month, with liquidity becoming an issue as the festive season begins to take hold. Traditionally, the final two to three weeks in December produces some inexplicable price action, fuelled by lack of interest or volume. Many investors prefer to wade to the sidelines after the December jobs report and renew their interest early in the New-Year.

On tap for next week

With most of the major event risk out of the way, except for the FOMC December 16-17 meet, next week the market pace is expected to subside a tad. Nevertheless, a number of Central Banks will be applying some obligatory pressures to their respective currencies and domestic yields. The U.K and China will kickstart the week with production and inflation data. The Kiwi’s and the Swiss cash rates announcements mid-week will follow this. Their respective press conferences should be able to provide the market with some festive color. The ECB and its targeted LTRO dominates Thursday’s event, while U.S retail sales and consumer sentiment will round off the week.

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