Canadian Currency Weakens as U.S. Growth Fuels Fed Speculation

Canada’s dollar fell after data showed the economy of the U.S., the nation’s biggest trade partner, grew more than forecast, bolstering bets the Federal Reserve will slow monetary stimulus sooner than predicted.

The currency erased earlier gains after the European Central Bank unexpectedly cut interest rates to a record low to head off the threat of deflation. Losses were tempered before a report tomorrow forecast to show Canada added jobs in October for a third straight month. The U.S. dollar gained versus most major peers after America’s gross domestic product expanded at the fastest pace in a year. Commodities and stocks fell.

“Every time there’s good news, the market thinks, ’Oh no, there’s not going to be as much cheap money,’” Jane Foley, senior currency strategist at Rabobank International, said by phone from London. “The market associates the loonie with commodity prices, and cheap money underpins speculative demand, risk appetite. Better demand for commodities is associated with that, and the Canadian dollar can be associated with that.”

The loonie, as the Canadian dollar is nicknamed for the image of the waterfowl on the C$1 coin, depreciated 0.4 percent to C$1.0462 per U.S. dollar at 5 p.m. in Toronto. It advanced 0.1 percent earlier. One Canadian dollar buys 95.58 U.S. cents.

The benchmark 10-year government bond rose, pushing yields down two basis points, or 0.02 percentage point, to 2.52 percent. The price of the 1.5 percent security maturing in June 2023 added 15 cents to C$91.43.

The Bank of Canada said it will auction C$1.4 billion ($1.3 billion) of bonds on Nov. 13. The 3.5 percent government securities mature in December 2045.

Options Trading

Trading surged today in over-the-counter foreign-exchange options on the U.S.-Canada-dollar exchange rate. It totaled $4 billion, or 8 percent of trades, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. That was 375 percent more than the average for the past five Thursdays at a similar time in the day.

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 reached 1.32 percent, the highest level since Oct. 17. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Futures of crude oil, Canada’s largest export, dropped as much as 1.1 percent to $93.80 a barrel in New York, almost a four-month intraday low, and Standard & Poor’s GSCI Index of raw materials fell 0.8 percent. The S&P 500 Index of U.S. stocks slid 1.3 percent.

‘Coming Off’

“You have commodities coming off today, stocks coming off today -- all else being equal, you’re going to have dollar-Canada higher,” said Adam Button, a currency analyst at forexlive.com, by phone from Montreal.

U.S. GDP rose at a 2.8 percent annualized rate in the third quarter after a 2.5 percent gain the prior three months, a Commerce Department report showed in Washington. Economists surveyed by Bloomberg projected a 2 percent advance.

“What you’ve seen is upward pressure on any U.S. dollar cross as the market has decided that betting against the buck might not be the wisest move,” Brad Schruder, director of foreign exchange at Bank of Montreal, said by telephone from Toronto. “That outperformance of the American economy has forced a reassessment of how the Federal Reserve will move ahead with their plans and their timing around tapering.”

The Fed buys $85 billion of bonds each month to push down long-term yields and spur growth, an effort that tends to fuel risk appetite while debasing the greenback. The central bank said Oct. 30 it would maintain the purchases as it awaited further evidence of economic progress. A Bloomberg survey last month forecast the Fed will begin showing purchases in March.

ECB Cut

The loonie reversed an early advance after ECB policy makers meeting in Frankfurt reduced the main refinancing rate by a quarter-percentage point to 0.25 percent. The decision was predicted by three of 70 economists in a Bloomberg News survey. Central-bank President Mario Draghi warned the euro area risks a “prolonged period” of low inflation after it faded to 0.7 percent in October, the slowest in four years.

Canada’s currency fell 0.4 percent over the past week against nine developed-market currencies tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar was little changed.

The Canadian economy added 11,000 jobs in October after a gain of 11,900 the month before, according to the median estimate in a Bloomberg survey of 22 economists before a report tomorrow. Separate data will show work started on 190,800 new homes in Canada in October, from 193,600 new homes the months before, a Bloomberg survey forecast.

Employment growth in the U.S. slowed last month, a government report tomorrow is projected to show. American employers added 120,000 jobs, versus 148,000 in September, economists polled by Bloomberg estimated.

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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