Canadian Dollar Fluctuates as U.S. Economy Contracts

Canada’s dollar traded close to a six-month low versus its U.S. counterpart as data showed the economy of the nation’s largest trading partner unexpectedly shrank in the fourth quarter.

The Canadian pared losses after the U.S. Federal Reserve said it will keep buying bonds as the economy paused because of temporary forces including bad weather. Canada’s gross domestic product figures tomorrow are forecast to show growth increased to 0.2 percent in November from 0.1 percent the month before, according to the median estimate of a Bloomberg survey of 24 economists.

“When the data came out, the headline looked dismal,” said Emanuella Enenajor, an economist at CIBC World Markets by phone from Toronto. “But some key sectors anticipated to lead the U.S. recovery were quite strong, so that’s where you saw the Canadian dollar gain ground in the post knee-jerk reaction.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, was little changed at C$1.0014 per U.S. dollar at 5 p.m. in Toronto after earlier falling 0.4 percent to C$1.0053. One loonie buys 99.86 U.S. cents. The currency touched C$1.01 on Jan. 28, the weakest level since July 27.

Oil, Stocks

Crude oil, the country’s largest export, added 0.5 percent to $98.04 per barrel and the Standard & Poor’s 500 Index of stocks fell 0.4 percent.

The country’s benchmark 10-year bonds were little changed, with yields of 2 percent. The 2.75 percent security maturing in June 2022 were unchanged at C$106.41.

The Bank of Canada sold C$2.9 billion ($2.9 billion) of 1.5 percent notes due in June 2023 at an average yield of 2.112 percent. The bank received bids totaling C$6.2 billion.

The Fed will keep purchasing securities at the rate of $85 billion a month. The U.S. central bank is buying unlimited amounts of Treasury and mortgage-backed securities in a bid to end a four-year long period of unemployment above 7.5 percent and bolster an economy that shrank 0.1 percent in the fourth quarter.

“This reinforces a dovish Fed, however most of the key parts of the statement are essentially identical, the only change is that there is a pause in economic activity but it is blamed on transitory or temporary factors,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS) by phone from Toronto.

The U.S. economy was restrained by the biggest plunge in defense spending in four decades and dwindling inventory growth as household purchases picked up, Commerce Department figures showed.

Headline Risk

“It looks like risk sentiment overall is taking a bit of a hit after the U.S. GDP numbers,” said David Watt, chief economist at HSBC Holdings Plc. by phone from Toronto. “You begin to wonder where the bounce for the Canadian economy is going to come from.”

The Bank of Canada held its 1 percent interest rate when it met last week, revising down growth forecasts and saying rate increase were “less imminent” given the slowing economy.

Investors trimmed bets the Bank of Canada would boost interest rates this year following the announcement. They now price in 3.1 basis points of tightening by the Bank’s September meeting compared with 6.8 basis points before last week’s announcement, according to Bloomberg calculations based on overnight index swaps.

The Canadian dollar fell 0.6 percent to C$1.3589 per euro as economic confidence in the euro area improved, adding to signs that the 17-nation currency bloc may be emerging from a recession.

Euro Conditions

An index of executive and consumer sentiment rose to 89.2 from a revised 87.8 in December, the European Commission in Brussels said today. That’s the highest since June. Economists forecast an increase to 88.2, according to the median of 30 estimates in a Bloomberg News survey.

“It’s certainly a theme the euro is gaining today against every other currency, including the Canadian dollar,” said Adam Cole, head of global currency strategy at Royal Bank of Canada, by phone from London. “It’s playing out specifically in European risk premium rather than global risk premium. I’m not sure why that’s the case exactly, but it does rationalize why it’s not spilling into currencies that typically win on risk-on days.”

The loonie will strengthen to 98 cents per U.S. dollar by the end of the March and 97 cents by the end of the year, according to the median estimate in a Bloomberg News survey of 45 analysts and strategists.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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

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