The holiday season was quite eventful, with the U.S. avoiding its fiscal cliff with an eleventh-hour agreement. Following months of conflict, Republicans and Democrats finally agreed to delay budget cuts and raise tax rates for the wealthy. Even if the announcement was well received in the markets, we can still expect major confrontations in Washington over the next few months regarding the debt ceiling and management of public spending.
The U.S. employment figures released on Friday were very close to expectations: the unemployment rate for December 2012 was 7.8% and 155,000 jobs were created. In Canada the news for December was also good, with the unemployment rate falling from 7.3% to 7.1% and 39,800 jobs created. Following the release of these figures, the Canadian dollar rose over 0.5% in 10 minutes
The Loonie
“Experience enables you to recognize a mistake when you make it again.” - Franklin P. Jones
The New Year got off to an unusual start. Throughout December, the U.S. President and the members of Congress had investors holding their breath over the outcome of talks on the fiscal cliff. Then, at the last minute, Democrats and Republicans were able to reach an agreement to prevent the country from slipping into another recession. Essentially, with the exception of individuals earning more than $400,000 per year, U.S. income taxes will not rise from 2001 levels.
Unfortunately—and here’s the rub—Congress did not vote on any major cuts in spending. This therefore leaves the federal government with a slightly less enormous deficit in the short term, but with long-term budget problems that are as troubling as ever. Here, the U.S. representatives and senators will need to reach an agreement on the debt ceiling, because the government does not currently have the right to borrow beyond the $16 trillion ceiling negotiated in a last-minute deal in the summer of 2011. In short, the U.S. political model will continue to be tested.
On a slightly different note, 2013 began with good economic news. On Friday we learned of encouraging employment growth in the U.S. and Canada in December, despite the fiscal cliffhanger. As the above graph shows, the two economies created slightly fewer jobs than they did in November but nevertheless managed to exceed investors’ expectations. More specifically, the Canadian economy (the green line) continues to post an impressive performance.
For the third consecutive month, the economy significantly outperformed economists’ expectations. If we compare these figures with U.S. figures for an economy that is almost 10 times larger, we see that Canada created over 2.5 times more jobs, in relative terms. While it may be too soon for such predictions, a wave of good economic news may force our central banker to apply a less expansionary monetary policy, i.e. raise Canada’s key interest rate.
The resulting impacts on the Canadian dollar and Canada’s yield curve are very clear: the CAD would immediately jump several points against the greenback, and the yield curve would continue the upward trend begun at the end of December.
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