Low job creation weighs on loonie

TORONTO (Reuters) — Canadian job creation slumped during July while the United States posted a strong jobs report, leading to ideas that the Canadian dollar will be under pressure.

The bets against the loonie were increased by a record-wide Canadian trade deficit.

The Canadian economy unexpectedly shed 31,200 jobs last month, driven by a decline in full-time positions that sent the unemployment rate up to 6.9 percent, data from Statistics Canada showed.

In addition, Canada’s trade gap unexpectedly widened to a record deficit in June as imports of motor vehicles and parts jumped while the increase in exports was lackluster.

It was a different story in the U.S. where nonfarm payrolls rose by 255,000 in July, far outpacing expectations for a gain of 180,000.

The U.S. unemployment rate was static at 4.9 percent, remaining below the five percent mark associated with full employment.

“It’s a nightmare scenario for the Canadian dollar, essentially a robust U.S. report and a pair of ugly Canadian numbers. It doesn’t get much worse than this,” said Doug Porter, chief economist, BMO Capital Markets.

Lower oil prices added to pressure on the commodity-linked Canadian dollar as a glut of crude and refined products weighed on markets and investors eyed a possible stutter in China’s imports.

Canada’s second-quarter trade deficit hit a record, with exports tumbling 4.7 percent, their biggest decline since 2009, data showed. Export growth has been weak after a strong gain in January.

A 0.6 percent rise in June exports came largely due to a jump in prices, with volumes down 1.4 percent.

The bleak Canadian trade data in June fueled concerns the Bank of Canada has been too optimistic about non-energy exports helping to revive the country’s struggling economy, economists said.

Non energy shipments were down 0.4 percent in June.

The situation is not bad enough to spur additional rate cuts, but could soon prompt a more cautious tone from the central bank, they said in interviews.

“It will give the bank pause,” said Paul Ferley, assistant chief economist at Royal Bank of Canada.

“I think the bank is going to express caution, disappointment with the trade number, but probably also imply that they are going to continue to monitor the data.”

While the figures are prone to revisions and May’s wildfires in Alberta made it difficult to determine how the economy is performing, economists said the data raise a red flag.

The stronger jobs performance in the U.S. raised the potential for an interest rate hike by the end of the year.

However, the U.S. Federal Reserve may still wait for gross domestic product growth to improve and inflation to move closer to its two percent target before pulling the trigger on a rate hike.


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