Canadian Dollar Rallies as Jobs Gains Boost Rate-Increase Views

The Canadian dollar rose for the first time in three weeks as jobs gains last month that were five times higher than forecast added to speculation the Bank of Canada may be moving closer to boosting interest rates.

The loonie, so called for the image of the waterfowl on the C$1 coin, strengthened and stocks gained amid increased demand for riskier assets as the unemployment rate in the U.S., the nation’s largest trade partner, unexpectedly fell to a three- year low. Canada’s trade deficit narrowed in August from a record in July, according to a Bloomberg News survey of economists before a report on Oct. 11.

“It’s all about employment right now and that’s been the driver,” David Tulk, chief macro strategist at Toronto-Dominion Bank (TD)’s TD Securities unit in Toronto, said in a phone interview. “The loonie is most closely correlated with equities, so over the balance of the week, the stronger backdrop for equity performance flows through to the Canadian dollar.”

The Canadian dollar rose 0.5 percent this week to 97.86 cents per U.S. dollar in Toronto, the first gain since the five days ended Sept. 14. One Canadian dollar buys $1.0219.

Position Changes

Futures traders trimmed bets the Canadian dollar will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an advance in the Canadian dollar compared with those on a drop -- so-called net longs -- was 101,176 on Oct. 2, compared with net longs of 105,346 a week earlier.

Implied volatility for one-month options, the anticipated price swings for the dollar-Canada exchange rate, fell to 6.71 percent yesterday, the least since Sept. 28. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Canadian government bonds fell for the first time in three weeks, pushing the yield on 10-year debt up eight basis points, or 0.08 percentage point, to 1.81 percent. The 2.75 securities declined 75 cents to C$108.33.

The Bank of Canada will auction C$2.7 billion ($2.8 billion) in three-year notes on Oct. 10. The last sale of this note maturity on Aug. 29 was C$2.9 billion and yielded 1.278 percent with a bid-to-cover ratio of 2.73.

Macklem View

Canada’s dollar rose after Bank of Canada Senior Deputy Governor Tiff Macklem reiterated on Oct. 4 that policy makers may withdraw monetary stimulus as the nation’s economy recovers.

“To the extent that the economic expansion continues and the excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” Macklem said in a speech in Winnipeg, Manitoba.

The central bank’s benchmark interest rate has been 1 percent for more than two years, the longest pause since the 1950s. The central bank has indicated since April it may raise rates, and in July forecast the economy may reach full capacity in the second half of next year.

Overnight Index Swap implied probabilities yesterday show 99.1 percent of the market expects no change in the central bank’s benchmark rate at the Oct. 23 Bank of Canada meeting.

Jobs Growth

Canadian employment rose by 52,100 jobs following an August gain of 34,300, Statistics Canada said yesterday. The nation’s jobless rate rose to 7.4 percent from 7.3 percent as the labor force grew by 72,600. The job gain exceeded all 24 forecasts in a Bloomberg survey, while the unemployment rate was projected to be unchanged.

“The economic fundamentals of Canada are still pretty sound,” Steve Butler, director of foreign-exchange trading in Toronto at a unit of Bank of Nova Scotia (BNS), said before the report. “A strong employment number gives support to the Bank of Canada’s stance that they would prefer to withdraw stimulus sooner rather than later.”

Canada’s trade deficit was C$1.9 billion in August, down from a record C$2.4 billion in July, according to the median in a Bloomberg News survey of 17 economists,

The loonie declined earlier during the week as economic data from China weakened, adding to concern about slowing global economic growth.

China’s nonmanufacturing industries expanded at the weakest pace since at least March 2011 as the purchasing managers’ index fell to 53.7 in September from 56.3 in August. Readings above 50 indicate expansion.

Stocks advanced 1.4 percent this week, snapping two weeks of losses. The Standard & Poor’s Index has rallied 17 percent this year. Oil declined 2.5 percent to $89.89 a barrel, capping a third weekly drop on the New York Mercantile Exchange.

Canada’s dollar has gained 2.1 percent this year against nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Currency Indexes. The greenback has dropped 2.6 percent.

To contact the reporter on this story: Katia Dmitrieva in Toronto at edmitrieva1@bloomberg.net

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

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