OTTAWA (Reuters) - Starkly contrasting data on Friday showed Canada's jobs market giddily topping expectations in September after a dismal August trade performance, testing the Bank of Canada's resolve to hold rates unchanged through mid-2010.
Two Bank of Canada surveys also showed businesses were more upbeat in the third quarter about sales and credit but continue to postpone major investments because they expect the recovery to be very gradual.
The Canadian dollar raced to a one-year high after the jobs data, which showed 30,600 new jobs and the unemployment rate falling to 8.4 percent from 8.7 percent.
This was tempered 90 minutes later when news emerged that August's trade deficit hit a record C$1.99 billion ($1.91 billion), twice what was expected, as exports fell by 5.1 percent while imports dropped by only 2.8 percent.
"Jobs may be a plus on the morning and thus are putting a bounce in the step of the hawks, but trade numbers are vastly disappointing and that punctuates the Bank of Canada's dilemma," Scotia Capital economist Derek Holt wrote to clients.
"The domestic economy remains fairly resilient while the trade sector continues to get whacked."
The central bank must decide whether to stick with its conditional pledge to keep its target interest rate at a rock-bottom 0.25 percent through the middle of next year or follow Australia's lead in hiking them early.
"The bad news is this is going to keep that currency market looking at who's next in terms of global central banks in the tightening cycle and the Bank of Canada seems to be a favorite according to currency markets," said Craig Wright, chief economist at Royal Bank of Canada.
"If we get a long series of upside surprise like this and of course the conditions change then so to will the commitment, but right now I think it's safe," he said.
Prime Minister Stephen Harper warned on Friday that Canada's job market could well fluctuate in coming months despite unexpectedly good data.
"I don't think we're out of the woods," Harper told a televised news conference.
"My big concern remains the United States. ... We have to be realistic that these problems in the United States do continue to create real drags on the Canadian economy."
By late morning, the Canadian dollar traded at C$1.0428 to the U.S. dollar, or 95.90 U.S. cents. This was up from C$1.0500 just before the jobs data was released.
Some economists think the Canadian dollar's rise may effectively already be doing any monetary tightening the Bank of Canada may have wanted to do.
The decline in the unemployment rate was the first since the financial crisis began and provided fresh hope the economy was rebounding from recession. Economists had expected the rate to rise to 8.8 percent.
But the reality check provided by the trade report raised worries that exports will continue to slide in coming quarters, exacerbated by the strengthening Canadian dollar. That may hinder economic growth next year.
"With a trade deficit in four of the past five months, it's time to get used to it," said Benjamin Reitzes, economist at BMO Capital Markets.
Business managers surveyed by the central bank do not see a clear cut path to recovery either and although they see sales improving, they do not expect to return to capacity production for at least another six months.
Most expect investment in machinery and equipment to be unchanged or lower over the next year, the poll showed.
Businesses perceived credit conditions to be stabilizing in Canada. Loan officers, surveyed separately by the Bank of Canada, saw continued tightening of credit in the third quarter although that view was less prevalent than in the second quarter.
Reporting by Louise Egan; Editing by Jeffrey Hodgson