Canada Dollar Drops to Two-Month Low as U.S. Data Fuel Fed Bets

Canada’s dollar slid to the weakest level in two months as stronger-than-forecast U.S. job growth fueled bets the Federal Reserve will start slowing the monetary stimulus that’s boosted riskier assets.

The currency rose against the majority of its 16 most-traded peers after Canada reported its employers added jobs for a third straight month and housing starts rose to a five-month high. The Fed buys $85 billion of bonds a month to cap borrowing costs and spur improvement in the economy and labor market.

“One of the big things that has helped the loonie over the last year before we started to see weakness in the last couple months is the Fed and a lot of the other central banks flooding the world with liquidity,” Scott Smith, senior market analyst at Cambridge Mercantile Group, a foreign-exchange and payments company, said by phone from Calgary. “When you have good data in the U.S., that’s going to push up expectations of when the Fed’s going to look to pare back.”

The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, depreciated 0.2 percent to C$1.0479 per U.S. dollar at 5 p.m. in Toronto. It reached C$1.0504, the weakest level since Sept. 6. The currency lost 0.6 percent this week. One Canadian dollar buys 95.43 U.S. cents.

Government bonds fell, pushing yields on benchmark 10-year debt (GCAN10YR) to a three-week high. The yields jumped nine basis points, or 0.09 percentage point, to 2.61 percent, the highest since Oct. 16. The 1.5 percent security maturing in June 2023 lost 72 cents to C$90.71.

Futures of crude oil, Canada’s largest export, gained 0.2 percent to $94.35 per barrel in New York and the Standard & Poor’s 500 Index of U.S. stocks climbed 1.3 percent.

Second-Best

The Canadian currency was the second-best performer today among the 10-developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The loonie gained 0.5 percent, trailing only the U.S. dollar’s 0.8 percent advance. The U.S. is Canada’s biggest trade partner.

The cost to insure against declines in the Canadian currency versus its U.S. peer rose to a three-week high. The three-month so-called 25-delta risk-reversal rate reached 1.34 percent, the most 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 traders increased their bets that Canada’s currency will decline against the greenback, 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 a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 18,002 on Nov. 5, the widest since Sept. 20. It was 15,237 as of Nov. 1.

U.S. ‘Acceleration’

The addition of 204,000 workers to U.S. payrolls in October followed a revised 163,000 gain in September that was larger than initially estimated, Labor Department figures showed today in Washington. The median forecast of 91 economists surveyed by Bloomberg called for a 120,000 advance. The jobless rate rose to 7.3 percent from an almost five-year low.

“It speaks to an acceleration in the economic cycle in the States faster than it will happen in Canada, which suggests a bid for the U.S. dollar over Canada,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada, by phone from Toronto.

U.S. gross domestic product jumped 2.8 percent in the third quarter, beating a 2 percent forecast in a Bloomberg poll, a report showed yesterday.

Fed Stimulus

The Fed said last month it would maintain its monthly bond-buying as it awaited further evidence of U.S. economic progress. The purchases tend to debase the greenback while fueling risk appetite. A Bloomberg survey last month forecast the central bank will begin slowing the pace of purchases in March.

Canadian employment rose by 13,200 in October, and the jobless rate held at 6.9 percent, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News projected unemployment would increase to 7 percent and employers would add 11,000 positions, according to median forecasts.

Housing starts in the nation totaled 198,282 at a seasonally adjusted annual pace last month, Ottawa-based Canada Mortgage & Housing Corp. said on its website today. That was up from 195,929 units in September. Economists in a Bloomberg survey forecast a reading of 190,800.

The Bank of Canada last month cut its growth projections for the next two years and removed language about the need for higher interest rates that had been included in every policy statement for a year.

The central bank, which has held its key rate at 1 percent since 2010+-, said the export pick-up that underpins its growth projections is taking longer than expected to materialize.

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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