Canadian Dollar Weakens Most in 7 Weeks on Unexpected Jobs Drop

The Canadian dollar weakened the most in seven weeks after employment unexpectedly declined for the second time in three months in April, boosting bets the Bank of Canada may lower interest rates to support economic growth.

The currency dropped from almost the strongest level against the U.S. dollar in four months as employment fell by 28,900 in April and the participation rate declined to the lowest in more than 12 years, Statistics Canada said in Ottawa. The Canadian currency sank to a 4 1/2 year low of C$1.1279 on March 20, two days after Bank of Canada Governor Stephen Poloz said he couldn’t rule out interest-rate cuts.

Today’s job report “will add to ammunition that Poloz has in his back pocket to remind people that the economy isn’t running at full steam and the desire for a weaker currency to help the export sector,” Ken Wills, a senior corporate dealer at CanadianForex, said by phone from Toronto. “This number was definitely a big miss. It will weigh on the currency.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.6 percent to C$1.0898 per U.S. dollar at 5 p.m. in Toronto after slipping 0.8 percent, the biggest drop since March 19. The decline pared the currency’s second weekly gain to 0.7 percent. The loonie climbed yesterday to $1.0814, the strongest level since Jan. 8.

Carved Loonie

The loonie will weaken in 2015 to levels not seen in five years, according to Greg Moore, senior currency strategist at Royal Bank of Canada, based in part on a new model known as Canadian Dollar Relative Value Estimate, or Carve.

Moore said he is expecting the Canadian dollar to weaken to C$1.15 by year-end and C$1.18 by the end of next year. He said the bank’s model uses the currency’s relationship to commodity prices, the difference between short-term interest rates in the U.S. and Canada, and capital inflows, especially foreign purchases of Canadian bonds.

“When the positive influence of capital inflows was removed late last year, the model outcome lurched to as high as C$1.20,” said Moore, who joined RBC Capital Markets in January. The loonie hasn’t touched C$1.18 since May 2009.

The median estimates in a Bloomberg survey of more than 50 economists call for Canada’s currency to weaken to C$1.13 year-end before rebounding to C$1.11 at the end of 2015.

Futures traders increased their bets the Canadian dollar 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 loonie compared with those on a gain -- so-called net shorts -- was 31,600 on May 6, compared with net shorts of 30,295 a week earlier.

‘Widespread Slowness’

Canada’s currency plunged after employment dropped last month following a 42,900 gain in March, and compared with a 13,500 job increase forecast by economists surveyed by Bloomberg News. Accommodation and food service jobs led the decline by industry, falling by 32,200.

The unemployment rate remained at 6.9 percent, as predicted in a Bloomberg survey, while 25,600 people left the labor force to push the participation rate to 66.1 percent, the lowest since November 2001.

“With the data weak across all sectors, it does suggest a widespread slowness in job growth -- manufacturing is still struggling to add jobs,” said Don Mikolich, executive director of foreign-exchange sales at Canadian Imperial Bank of Commerce. “With the market having strengthened so far these past few sessions, it’s not surprising to see a bit of a pullback.”

Both Mikolich and CanadianForex’s Wills forecast the loonie to weaken to C$1.12 by the end of June before strengthening to C$1.08 by year-end.

Bond Rally

Exports are failing to jolt a halting recovery in an economy too dependent on debt-fueled consumer growth, Poloz said April 16. The central-bank chief has moved from talking about raising the policy interest rate to contemplating an interest-rate cut.

The prospect of slow economic growth and a possible rate cut are seen fueling a rally in the nation’s bond market. Canadian government debt has gained 3 percent this year, the best start to a year since 1998, Bank of America Merrill Lynch index data show. Ten-year bond yields, which last touched 3 percent almost three years ago, were at 2.36 percent.

‘Still Sluggish’

Economists surveyed by Bloomberg News from May 2 to May 8 cut forecasts for the next eight quarters versus projections last month, putting the 10-year yield at a median 2.98 percent by the end of this year. That’s the lowest level since June, and down from 3.14 percent in an April survey.

“Exports are still sluggish and not enough to support growth,” said Charles St-Arnaud, London-based senior economist at Nomura Securities International Inc., who expects a 10-year yield of 2.95 percent in the fourth quarter. “The sensitivity of U.S. exports to Canadian growth has also decreased, so there is a case there to be cautious.”

The loonie has tumbled 4 percent this year against a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the worst performance in the group.

To contact the reporter on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Kenneth Pringle, Paul Cox

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