The Canadian dollar strengthened against its US counterpart on Friday following a better-than-expected jobs report in December. The Canadian economy is on the brink of a significant economic slowdown, but investors were taken aback by the solid employment gains last month. Can economic conditions improve heading into 2023?

According to Statistics Canada, the Canadian economy added 104,000 new jobs in December, topping economists’ expectations of just 8,000. This was supported by the 84,500 new full-time positions and 19,500 new part-time jobs. The unemployment rate dipped to 5%, while average hourly wages eased to 5.2% year-over-year last month.

At the same time, Canada’s Ivey Purchasing Managers Index (PMI) plummeted into contraction territory in December, coming in at 33.4, down from 51.4 in November. This was the first contraction in economic activity since July and the sharpest drop since April 2020.

This comes days after the S&P Global Manufacturing PMI fell to 49.2 last month, down from 49.6 in the previous month.

In addition, Canada slipped into a trade deficit, suggesting that demand for the nation’s goods and services is deteriorating. Exports eased to $64.37 billion and imports slowed to $64.41 billion.

Meanwhile, south of the border, the US reported a goldilocks December jobs report:

“According to the Bureau of Labor Statistics (BLS), the US economy added 223,000 new jobs in December, higher than the market estimate of 200,000. This was down from the downwardly revised 256,000 gains in November.

The unemployment rate fell to 3.5% in December, down from 3.6% in November. It also came in below economists’ expectations of 3.7%.

Average hourly earnings eased to 4.6% year-over-year in December and average hourly earnings rose just 0.3% month-over-month to nearly $33. Last month’s wage growth was also revised down to 0.3%. Average weekly hours edged down to 34.3.

Employment gains were concentrated in a few sectors: leisure and hospitality (67,000), health care (55,000), construction (28,000), and social assistance (20,000). Job trends were flat in other sectors, such as retail, manufacturing, mining, and government.

In addition, total non-farm payrolls were revised down in October and November by 21,000 and 7,000, respectively.”

The Canadian bond market was red across the board, with the benchmark ten-year yield down nine basis points to 3.093%. The one-month bill shed two basis points to 4.15%, while the 30-year bond tumbled 6.6 basis points to 3.094%.

The USD/CAD currency pair tumbled 0.63% to 1.3484, from an opening of 1.3570, at 14:55 GMT on Friday. The EUR/CAD rose 0.16% to 1.4299, from an opening of 1.4276.