Canada Dollar Drops Most in 5 Weeks on Outlook for Fed Tapering

The Canadian dollar fell the most in five weeks on speculation a projected drop in the U.S. jobless rate last month may bolster the case for the Federal Reserve to slow monetary stimulus in Canada’s biggest trade partner.

The currency weakened as data showed applications for jobless benefits in the U.S. unexpectedly fell to a five-year low and manufacturing rose. The U.S. dollar gained versus 16 major peers. Data due tomorrow are forecast to show the U.S. jobless rate declined to 7.5 percent last month, from 7.6 percent, according to a Bloomberg survey. Canada reported yesterday its economy grew more slowly in May than forecast.

“Investors are paying more attention to this impressive string of data out of the U.S.,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said in a telephone interview from Washington. “Investors see a positive case still for a taper in Fed policy as early as next month.”

The loonie, as the Canadian dollar is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated 0.7 percent, the most on a closing basis since June 21, to C$1.0346 per U.S. dollar at 5 p.m. in Toronto. One loonie purchases 96.66 U.S. cents.

The Australian dollar, the currency of a fellow commodities-exporting country, reached a three-year low against its Canadian counterpart amid speculation the South Pacific nation’s central bank will cut interest rates next week. The Aussie touched 91.72 Canadian cents, the weakest since July 2010, before trading little changed at 92.36 cents.

July Gain

Canada’s dollar climbed 2.4 percent in July against the greenback in the biggest gain since October 2011 as the price of oil, the nation’s largest export, gained the most since August 2012. Futures on crude rose 8.8 percent last month.

“The trend in the crude-oil price is probably more than anything what drove that rally through July,” David Doyle, a strategist at Macquarie Capital Markets, said by telephone from Toronto. “The data has been better out of the United States over the past few days than it was over the middle of the month.”

Crude futures advanced 2.7 percent today to $107.81 per barrel in New York. Stocks climbed, with the Standard & Poor’s 500 Index gaining 1.3 percent.

The cost to insure against declines in the Canadian dollar versus its U.S. peer rose to a three-week high. The three-month so-called 25-delta risk reversal rate advanced to 1.4 percent, the most on a closing basis since July 10. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Bonds Drop

Canada’s government bonds fell, pushing the benchmark 10-year security’s yield up nine basis points, or 0.09 percentage point, to 2.55 percent. The yield touched 2.59 percent yesterday, the highest level on an intraday basis since August 2011. The price of the 1.5 percent debt due in June 2023 dropped 78 cents today to C$90.98.

The loonie extended its loss as the U.S. dollar gained versus most major peers after European Central Bank President Mario Draghi told reporters following a policy meeting that officials expect interest rates in the region to stay low for an extended period.

The Bank of England also maintained stimulative policy measures at a meeting today.

Canada’s currency “is down against a generally stronger dollar,” Adam Cole, head of Group of 10 currency strategy in London at Royal Bank of Canada, said by phone. “I suspect the market is priced for a decent payrolls release. The data have been close to expectations most months recently.”

Employment Growth

Applications for unemployment insurance benefits in the U.S. declined by 19,000 to 326,000 in the week ended July 27, the fewest since January 2008, Labor Department data showed in Washington. The median forecast of 50 economists surveyed by Bloomberg called for 345,000.

The department’s report tomorrow on U.S. nonfarm payrolls will show the unemployment rate fell in July as employers added 185,000 jobs, another Bloomberg survey forecast.

A gauge of manufacturing in the U.S. rose in July at the fastest pace in more than two years. The Institute for Supply Management’s factory index increased to 55.4, the strongest since June 2011, data showed today. That exceeded the highest projection in a Bloomberg survey of economists. Readings above 50 indicate expansion.

Fed Chairman Ben S. Bernanke said this month a reduction in the central bank’s bond-buying program would depend on the economy’s performance. He said yesterday after a Fed meeting the U.S. expansion has been “modest” and pledged to keep purchasing $85 billion of bonds a month to hold down borrowing costs and spur growth. The central bank next meets Sept. 17-18.

Canadian GDP

Canada’s gross domestic product rose 0.2 percent in May from 0.1 percent the month before, the nation’s statistics agency reported yesterday in Ottawa. Economists in a Bloomberg survey had estimated 0.3 percent growth.

The loonie has gained 0.8 percent this year against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The euro has gained the most, rising 5.7 percent, while the Australian dollar is the biggest loser, with an 11 percent drop. The U.S. dollar advanced 5.6 percent.

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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