Canadian Rate Hike Expected Despite Jobs Data

Canada's employment data was disappointing but arguments for a Canadian rate hike remain intact.
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NEW YORK (TheStreet) - Canada's employment data was 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 the first quarter, after about 21k in the fourth quarter of 2009, 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 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 U.S. 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 U.S. Consider that over the past month, while the U.S. two-year yield has risen 21 bp to 1.08%, Canada's 2-year yield has risen 33 bp to 1.84%.

The U.S. 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 good interest to hedge by Canadian businesses near parity. Since early February, the U.S. 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.

Marc Chandler has been covering the global capital markets in one fashion or another for nearly 20 years, working at economic consulting firms and global investment banks. Currently, he is the chief foreign exchange strategist at Brown Brothers Harriman. Recently, Chandler was the chief currency strategist for HSBC Bank USA. He is a prolific writer and speaker and appears regularly on CNBC. In addition to being quoted in the financial press, Chandler is often a guest writer for the Financial Times. He also teaches at New York University, where he is an associate professor in the School of Continuing and Professional Studies. While Chandler cannot provide investment advice or recommendations, he appreciates your feedback;

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