An interesting article came out from the WSJ discussing Canada’s labor market versus the US and the impact on the foreign exchange market.

The focus started with the release of January job data from both the US and Canada.

StatsCan announced the economy added 69,200 jobs in January. That number was twice that of the 36,000 jobs expansion reported later by the U.S. Bureau of Labor Statistics. The Canadian figure exceeded expectations by almost 5x, whereas the US numbers were about half of expectations.

The WSJ journal extrapolated:

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.

Interestingly, the unemployment numbers for both countried went in opposite directions. The US rate fell to 9.0% from 9.4% in December, whereas Canada rose to 7.8% from 7.6%. The difference largely attributed to those who counted themselves as part of the workforce. Canadians seem to be re-entering in hopes that a increasingly active economy will provide more jobs.

No indication on whether they will find jobs or not.

The market, however, responded to the numbers in Canada with positivity. The dollar appreciated against the USD.

Now comes the hard part. For the Bank of Canada, responsible for setting interest rates, an economy that’s perceived to be adding jobs, and far more jobs compared to their Southern neighbors, would make increasing the interest rate hard.

An increase in interest rates would further put pressure on the Canadian dollar to appreciate (another reason for it to go up).

Part of the strength has to do with current commodity prices, at which the Canadian economic health is heavily reliant upon.

The question will become how long will Canada be capable of maintaining their torrid pace of job creation before they have to increase interest rates, pushing up their dollar even higher, and making those liing on the margins fall through the cracks. Higher interest rates could put strain on a fickle housing market, that despite its strengths, still has a number of consumers just making payments.

Then again, one could argue that this only affects new home buyers on variable plans. Most Canadians who are on fixed terms have been paying old rates from pre-2008 times. These folks are up for renewal and will in fact save, even with increases in the 1.0% interest rate.