Canada Dollar Gains Most in a Year as U.S. Manufacturing Slows

The Canadian dollar gained the most in almost a year against its U.S. peer as a weaker-than-forecast reading on American manufacturing damped speculation the Federal Reserve will reduce stimulus.

Canada’s currency advanced after a monthly loss in May that saw it reach its lowest point in a year before jobs data this week projected to show jobless rates held steady in both nations. It rose as stronger-than-forecast readings on manufacturing in Europe boosted investors’ appetite for riskier assets. Canada’s dollar extended gains after a Fed official said policy makers are committed to record stimulus even as they voice different views on tapering.

“We’re seeing a stampede out of U.S. dollars across the board,” Adam Button, a currency analyst at Forexlive.com in Montreal, said in a telephone interview. “The last month of trading has been predicated on the idea that the U.S. was gathering strength. As the numbers come in, that’s no longer a sure thing, and patience has run out for Canadian dollar sellers.”

The loonie, as the Canadian dollar is nicknamed, rose 0.9 percent to C$1.0278 per U.S. dollar at 5 p.m. in Toronto after adding as much as 1.1 percent, the biggest gain since June 29, 2012. The currency touched C$1.0421 per U.S. dollar May 29, its lowest point in a year. One loonie buys 97.30 U.S. cents.

Oil, Stocks

Crude-oil futures rose 1.5 percent to $93.30 a barrel in New York and the Standard & Poor’s GSCI index of 24 commodities gained 1.2 percent. The S&P 500 Index of stocks added 0.6 percent.

Canada’s benchmark 10-year government bonds rose, with yields falling one basis point, or 0.01 percentage point, to 2.05 percent. The 1.5 percent security maturing in June 2023 added 11 cents to $95.07.

The greenback declined against the majority of its most-traded peers as the Institute for Supply Management’s U.S. factory index fell to 49 from the prior month’s 50.7, the Tempe, Arizona-based group’s report showed today. Fifty is the dividing line between growth and contraction, and last month’s reading was the lowest since June 2009. The median forecast of 81 economists surveyed by Bloomberg was 51.

“It’s just a case of the U.S. dollar slipping back across the board,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “I’m not too sure that we’re going to see a clean risk-on, risk-off environment from here.”

Market Volatility

Fed Bank of Atlanta President Dennis Lockhart said in a Bloomberg Television interview that recent data, including the manufacturing decline reported today, suggest the economy isn’t strong enough to justify a reduction in the central bank’s $85 billion pace of monthly bond purchases.

The loonie briefly pared gains earlier after Fed Bank of San Francisco President John Williams said in Stockholm that U.S. policy makers may start reducing purchases over the next three months and stop the program by year-end.

“The potential for reduced asset purchases may mean that suppressed levels of market volatility will continue to rise,” a group of analysts from Toronto-Dominion wrote in a client note. “That has implications for the higher-yielding, higher beta currencies.”

JPMorgan Chase & Co.’s Global FX Volatility Index reached 10.24 percent on May 31, the highest since June 18, 2012. The gauge was at 10.23 percent today.

Risk Reversals

The one-month so-called 25-delta risk reversal rate fell to 1.1125, its lowest level since May 13. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Hedge funds and other large speculators last week decreased 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 on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 33,359 on May 28, compared with net shorts of 33,852 a week earlier.

The loonie gained with the dollars of Australia and New Zealand, fellow commodities exporters, as the euro-area manufacturing index increased to 48.3 last month from 46.7 in April, London-based Markit Economics said today. That’s above an initial estimate of 47.8 on May 23. It has been below 50, indicating contraction, since July 2011.

Canada’s currency has fallen 0.4 percent in the past month against nine developed nation currencies tracked by the Bloomberg Correlation Weighted Index. The greenback added the most, with a 1.8 percent advance. The Aussie dollar led decliners, dropping 4.3 percent.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE