The Canadian dollar fell in the longest streak since May as the country’s job market stagnated while U.S. employment growth exceeded forecasts, adding to evidence the two countries’ economies are diverging.
The loonie, as the currency is nicknamed, reached the lowest level in almost two years as U.S. June payroll data prompted speculation the Federal Reserve will start winding down monetary stimulus this year. Canada’s employment was little changed, with 400 jobs lost in June after adding 95,000 the month before, the most in more than a decade. Building permits dropped in May, according to median estimate in a Bloomberg survey before a July 8 report from Statistics Canada.
“The Canadian dollar is going to continue to weaken,” said Adrian Miller, the head of fixed-income strategy at GMP Securities LLC, by phone from New York. “The private sector as a whole is still losing jobs. The take away from that is that business investment, which the Bank of Canada looks to as one of the drivers, is going to struggle to materialize.”
The loonie fell 0.6 percent this week to C$1.0582 per U.S. dollar in Toronto, the third straight drop, the most since four straight weekly declines in the period ended May 31. The currency touched C$1.0609 per U.S. dollar yesterday, its weakest level since Oct. 4, 2011. One loonie buys 94.50 U.S. cents.
Winners, Losers
Canada’s dollar lost the most this week against its U.S. counterpart among major currencies. It rose the most, 2.6 percent, versus South Africa’s rand. Markets in Toronto were closed July 1 for the Canada Day holiday.
The currency’s 14-day relative strength index against the dollar was at 68, almost the 70 level that some traders see as a signal an asset has moved too far, too fast and may be due to reverse course.
Yields on Canada’s benchmark 10-year bonds rose to their highest point in almost two years. The 1.5 percent security maturing in June 2023 lost 92 cents to C$90.89, with yields rising 11 basis points, or 0.11 percentage point, to 2.55 percent, reaching the highest since August 2011.
The Bank of Canada will auction C$3.4 billion ($3.2 billion) of five-year notes with a coupon of 1.25 percent on July 10.
Jobs Data
Canada’s job gains have slowed this year, with the average monthly increase of 14,000 less than the 27,000 recorded in the second half of last year, Statistics Canada said July 5.
Futures on crude oil, Canada’s largest export, rose 7.3 percent to $103.60 per barrel in New York. Western Canada Select, the benchmark for oil-sands bitumen, traded at a discount of $15.75 to U.S. West Texas Intermediate price, up from $9.25 on June 12, the low for the year. The difference reached $41.50 on Jan. 14.
“When you have the oil price at 100 bucks and the Canadian dollar at C$1.06 that tells you it’s more a U.S. story than a made-in-Canada story,” said Clement Gignac, chief economist at Industrial Alliance Insurance and Financial Services Inc., by phone from Quebec City. “There’s no doubt in my mind that quantitative easing phasing out will start this fall and will finish probably next spring.”
Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said the Fed will begin tapering sooner than they had expected after U.S jobs data on July 5, which showed employers added 195,000 workers to payrolls for a second month in June. The gain exceeded the median forecast for a 165,000 increase in a Bloomberg survey of economists.
Fed View
The U.S. jobless rate stayed at 7.6 percent, while hourly earnings in the year ended in June advanced by the most since July 2011. Fed Chairman Ben S. Bernanke said on June 19 reductions in the U.S. central bank’s bond-buying program, which tends to devalue the currency, will depend on improvements in the job market. The Fed’s next policy meeting announcement is July 31.
The Bank of Canada will hold the benchmark interest rate at 1 percent for the rest of the year, according to all but one of 24 economists surveyed by Bloomberg. Traders are pricing in 5.6 basis points of tightening by the Bank of Canada’s Dec. 4 meeting, calculations based on trading in overnight index swaps show.
The central bank’s next rate decision is July 17.
The Bank of Canada has left interest rates unchanged since 2010 in the longest pause since the 1950s. The bank has included a warning its next move on interest rates would be to raise them in every policy statement for more than a year.
Growth Differences
Canada’s economic growth this year will be 1.7 percent, trailing the U.S.’s 1.9 percent, according to the median estimates of economist surveys by Bloomberg. U.S. out performance is forecast to continue until 2015, Bloomberg surveys show.
“We think Canadian economic growth should be somewhat slow and the U.S. economy should be somewhat stronger,” said David Doyle, a strategist at Macquarie Capital Markets, by phone from Toronto. “When those sorts of dynamics occur they tend to occur alongside periods where the loonie weakens.”
The cost to insure against declines in the loonie versus its U.S. peer increased from its lowest point in two weeks. The three-month so-called 25-delta risk reversal rate rose to 1.6200 yesterday, after hitting 1.5825 the day before, its lowest since June 20. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.
The Canadian dollar has dropped 0.4 percent in the past six months against nine developed nations currencies tracked by the Bloomberg Correlation Weighted Index. The Australian dollar has posted a 8.4 percent drop, while the U.S. dollar has jumped 7.6 percent.
