The Canadian dollar is on the move this morning following surprisingly weak labor market numbers. Last month, 21.9K jobs were lost in Canada, the largest decline in 6 months. Nearly all of those jobs were full time but part time work also fell by 1.4K. To some, labor market conditions may not appear to have deteriorated significantly because the unemployment rate dropped to a 4 year low of 7%. However don’t be misled by the improvement in the jobless rate because the only reason why it declined is because the participation rate also dropped to 66.6% from 66.8%. What is interesting is that more people are clocking out of the workforce in Canada, Australia and New Zealand, which plays into our belief that investors got ahead of themselves in terms of hoping for a stronger global recovery in the start of the year. The global economy will continue to recovery but the bumps in the road are happening early.

The Canadian dollar fell sharply after the release despite a narrower trade deficit because the deterioration in the labor market explains why the Bank of Canada became less hawkish at their last monetary policy meeting. Employment is also a leading indicator for economic activity because jobs affect spending. The trade deficit on the other hand was for the month of December and is one of the biggest lagging indicators. The deficit narrowed to -$0.901B from -$1.665 billion as exports declined 0.9% and imports fell 2.8%.

U.S. trade numbers were also good but the positive impact on USD/JPY was limited. In the month of December, the U.S. trade deficit narrowed to -$38.5B from -$48.6. This was third biggest month on month swing in history and the best reading since January 2010. Exports increased 2.1% thanks to a sharp improvement in petroleum while imports dropped 2.7%. USD/JPY is down more than 1% today after Mr. Aso said, “The yen’s sudden move from 78 or 79 to 90 was not something we anticipated.” While this may be true, we still believe that the Japanese government wants a weaker Yen so current USD/JPY levels could be attractive to bargain hunters.

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