Canada Labor Market Mocks America’s – Real Time Economics – WSJ

February 4, 2011, 2:48 PM ET

Canada Labor Market Mocks America’s

By Michael Casey

The Canadian and U.S. labor markets are currently mirror images of each other, and that’s fostering a straightforward strategy for currency traders: Buy the dollar of the north, sell the dollar of the south.

Canadians are going back to work, boosting the northern country’s currency.

At 7 a.m. EST, Canada’s statistics agency announced that the country’s economy added 69,200 jobs in January. That’s almost five times the forecast of 15,000. It’s also almost twice that of the 36,000 jobs expansion reported an hour and half later by the U.S. Bureau of Labor Statistics, a figure that was almost one-fourth the size of the consensus forecast of 136,000 jobs.

Canada’s population is one-ninth that of the United States. So its jobs gain could be said to be the equivalent of a 622,800 result for its giant southern neighbor. To find anything bigger than that in the BLS’s newly revised monthly data for the U.S. you have to go back to September 1983, when the resolution of a strike by AT&T workers contributed to a surge of 1,114,000 jobs in payrolls for the month.

It was a similarly contradictory result in the two countries’ unemployment numbers. Whereas the U.S. rate surprisingly fell to 9.0% from 9.4% in December, Canada’s rose to 7.8% from 7.6%. And much as the explanation for the falling U.S. jobless rate was ascribed to the fact that the number of people who counted themselves as part of the labor force had fallen, Canada’s increase was caused by a sharp expansion of 106,400 in its work force.

So in the United States, despondent job seekers are giving up the search while in Canada they are hopefully rejoining it. Might it also be the case that Americans are crossing the border to look for work in the north?

In response to this stark contrast between the two countries, the Canadian dollar rallied more than a cent to a 2 1/2-year high against its U.S. counterpart Friday. The U.S. dollar was last quoted at C$0.9896.

With Canadian Finance Minister Jim Flaherty and other officials lately giving strong signals that they won’t stand in the way of a rising Canadian dollar, buying it on Friday was a no-brainer for currency traders.

The jobs data raise the prospect that the Bank of Canada will at its March 1 meeting increase its benchmark overnight rate, which it has kept at 1.00% in its past three meetings. Compare that to the Federal Reserve, which hardly anyone expects to raise rates from their current near-zero level until well into the second half of the year. The carry between those rates is attractive to a currency trader.

The divergent job results aren’t a fluke.

Some of it has to do with luck. Canada’s exports are heavily concentrated in commodities whose prices are booming. As a comparatively smaller, open economy, Canada is more tapped into the healthier growth rates seen in Asia and the rest of the world than is the U.S., more driven by its domestic activity.

And some of the contrast in experiences has to do with policies that existed in the boom years before the 2008 financial crisis.

Canada’s stricter mortgage lending rules and tighter bank regulation kept its housing and financial sectors in check while the United States was consumed by a destructive real estate and credit bubble in the middle of the 2000s. This left the northern country less burdened by an overhang of unemployed construction workers, real estate agents and mortgage loan officers.

Still, the irony is that one reason Canada is doing so well is that it is tapping into a much-delayed rebound in growth in the south. The recovery in U.S. manufacturing (albeit a more or less jobless one, according to the BLS) was evident in strong data, such as this week’s business index from the Institute of Supply Management. And that’s helping Canada’s exporters.

The history of economic cycles tells us that the trajectories of the two countries’ economies should at some point converge. But for now, the gap is wide, even with the recovering in the U.S. And that will continue to underpin the Canadian dollar.



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