Canadian Dollar Falls on U.S. Jobs Weakness, European Debt Crisis Concern

Canada’s dollar declined against its U.S. counterpart and most other major currencies on speculation the U.S. economic recovery will slow in coming months and amid heightened concern the European debt crisis may spread.

The Canadian dollar, also known as the loonie, fell against 12 of its 16 most-traded peers. It declined 0.4 percent against the greenback, with most of the drop coming yesterday after the U.S. added fewer jobs than forecast in June and the unemployment rate climbed. Another American report, released the previous day by ADP Employer Services, had spurred optimism by showing U.S. companies exceeded hiring forecasts last month. Canada is projected to post its fourth straight monthly trade deficit when the government issues it may report on June 12.

“Markets were thrown a head fake by the ADP numbers on Thursday,” said Shane Enright, executive director at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, by phone from Toronto. Yesterday’s report was “disappointing, and when we get weak data out of the U.S., Canada always gets tarred with the same brush.”

The Canadian currency weakened 0.4 percent to 96.27 cents per U.S. dollar yesterday in Toronto, from 95.85 cents on July 1. One Canadian dollar buys $1.0388.

Jobs Miss

The increase in U.S. payrolls followed a 25,000 gain that was less than half the rise initially estimated, Labor Department data showed yesterday in Washington. The median estimate in a Bloomberg News survey called for a June gain of 105,000. The unemployment rate rose to 9.2 percent, the highest level this year.

“No matter how you cut it, the nonfarm payrolls report was ugly,” said David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto, in a note to clients. “The best thing one can say about this report is that it is slowly disappearing into the rear-view mirror and with a cyclical upturn expected in the months ahead, we should see a corresponding, albeit gradual, improvement in employment.”

The Fed has held its target rate for overnight lending between banks at zero to 0.25 percent since December 2008 to support the economy.

The loonie yesterday also touched the strongest level since May after a government report showed Canada’s employers added more jobs last month than economists forecast.

Canada Employs

Canada’s economy created 28,400 jobs in June after boosting payrolls by a net 22,300 positions in the previous month, Statistics Canada reported yesterday. The median forecast of 27 economists in a Bloomberg News survey was for a gain of 15,000. The jobless rate held at 7.4 percent.

“The Canadian currency is going to be in play,” said Lane Newman, director of foreign exchange at ING Groep NV in New York. Canada’s economy “will not be able to shrug off the weak numbers that we’re seeing in the U.S.”

The loonie weakened July 6 after China raised benchmark interest rates for the third time this year as inflation accelerated to the fastest pace since July 2008, damping demand for riskier assets.

Yields on two-year Government of Canada bonds fell 10 basis points, or 0.1 percentage point, to 1.5 percent, pushing the price of the 2 percent note due in August 2013 up 20 cents to C$101.01.

Canada sold C$3.5 billion ($3.6 billion) of five-year debt, drawing an average yield of 2.309 percent on July 6. The government received bids of C$8.7 billion for the 2.75 percent securities maturing in September 2016, according to a statement on the Bank of Canada’s website.

Bond Returns

Canada’s government bonds have returned 2.7 percent this year, according to a Bank of America Merrill Lynch index. The Canadian dollar has gained 3.7 percent against its U.S. counterpart in the period.

The nation will posted a May trade deficit of C$800 million, according to the median estimate in a Bloomberg survey of 20 economists before the July 12 report from Statistics Canada. Bank of Canada Governor Mark Carney warned last month that the nation’s exporters face “challenges” due to the “persistently strong” Canadian dollar and the “relatively poor productivity performance” of the economy.

Developments in Europe also weighed on the Canadian dollar. Investors sought to avoid riskier assets after Moody’s Investors Service slashed Portugal’s credit rating on July 5 to Ba2, below investment grade. Portugal is the second euro region country, after Greece, to have a junk rating.

‘More Dented’

“Risk sentiment is a little more dented these days,” said Enright at CIBC. “The market wants to be pro-risk, but there are still a few headwinds out there for that trade. The European story could overhang the market and be a drag for a while.”

European Central Bank President Jean-Claude Trichet said July 7 he will ease Portugal’s access to emergency funds as officials battle both faster inflation and the debt crisis. ECB officials this week increased the benchmark interest rate by 25 basis points to 1.5 percent, the highest since March 2009.

Crude oil futures rose 1.7 percent for the week to $96.54 a barrel in New York. Crude is Canada’s largest export. Copper futures gained 2.5 percent this week and have climbed 46 percent in the past year. Canada derives about half its export revenue from raw materials.

Canada’s dollar has weakened 1.7 percent this year versus the currencies of nine other developed nations in the fourth- worst performance, according to Bloomberg Correlation-Weighted Currency Indexes. The greenback has fallen 5.6 percent, the yen is off 5 percent and sterling is down 2.6 percent.

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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