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Canadian Dollar Falls to Lowest Since 2011 on Renewed Taper Bets

The Canadian dollar fell to the lowest level in almost two years as stronger-than-forecast U.S. job growth prompted speculation the Federal Reserve will proceed to start winding down monetary stimulus this year.

The nation’s currency weakened even as Canada lost fewer jobs than projected in June, hanging on to much of the gain of the previous month, which saw the biggest jump in a decade. U.S. job creation picked up with 195,000 positions created in June from 175,000 the month before. Economists surveyed by Bloomberg had predicted 165,000 new jobs. Fed Chairman Ben S. Bernanke said June 19 reductions in the Fed’s bond-buying program, which tends to devalue the currency, will depend on improvements in the job market.

“The Canadian dollar is beholden to external forces,” said Adrian Miller, the head of fixed-income strategy at GMP Securities LLC, by phone from New York. “As the U.S. dollar surges higher because of the strong job print here, which means a presumed quickening of the tapering, or an anti-debasing trend, all the other currencies by definition are going to suffer.”

The loonie, as the Canadian dollar is known, fell 0.6 percent to C$1.0582 at 5 p.m. in Toronto, touching its lowest since Oct. 4, 2011. One loonie buys 94.50 U.S. cents.

Bonds Fall

Yields on Canada’s benchmark 10-year bonds rose to their highest point in almost two years. The 1.5 percent security maturing in June 2023 lost C$1.11 cents to C$90.89, with yields rising 14 basis points, or 0.14 percentage point, to 2.55 percent, the highest since August 2011.

The Bank of Canada will auction C$3.4 billion ($3.2 billion) of five year notes with a coupon of 1.25 percent on July 10.

Futures on crude oil, Canada’s largest export, rose 2.3 percent to $103.57 per barrel in New York and the Standard & Poor’s 500 Index of U.S. stocks added 1 percent.

Canada lost 400 jobs in June after adding 95,000 the month before. Economists had predicted a 7,500 decline in a Bloomberg survey with 20 responses. Canada’s job gains have slowed so far this year, with the average monthly gain of 14,000 less than the 27,000 recorded in the second half of last year, Statistics Canada said.

“It’s the U.S. number we’re trading off at the moment and it’s the U.S. where policy is in the balance,” said Adam Cole, head of G-10 currency strategy at Royal Bank of Canada, by phone from London. “People will feel more secure in the idea that tapering starts before the year is out.”

Full-time employment fell by 32,400 in June, following a 76,700 gain the prior month. Part-time positions rose by 32,200, Statistics Canada said.

Private companies cut 5,300 workers last month after May’s 94,600 increase, while public-sector employment rose by 1,000.

Policy Rate

The Bank of Canada will hold the benchmark interest rate at 1 percent for the rest of the year, according to all but one of 24 economists surveyed by Bloomberg. Traders are pricing in 5.6 basis points of tightening by the Bank of Canada’s Dec. 4 meeting, calculations based on trading in overnight index swaps show.

The central bank’s next rate decision is July 17.

The U.S. jobless rate stayed at 7.6 percent, while hourly earnings in the year ended in June advanced by the most since July 2011. The Fed’s next policy meeting announcement is July 31.

“There’s no doubt in my mind that quantitative easing phasing out will start this fall and will finish probably next spring,” said Clement Gignac, chief economist at Industrial Alliance Insurance and Financial Services Inc., by phone from Quebec City. “When you have the oil price at 100 bucks and the Canadian dollar at C$1.06 that tells you it’s more a U.S. story than a made in Canada story.”

The cost to insure against declines in the loonie versus its U.S. peer rose from its lowest point in two weeks. The three-month so-called 25-delta risk reversal rate rose to 1.6200, after hitting 1.6125 yesterday, its lowest since June 20. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

The Canadian dollar has risen 1.1 percent in the past three months against nine developed nations currencies tracked by the Bloomberg Correlation Weighted Index. The Australian dollar has posted a 9.2 percent drop, while the U.S. dollar has gained 5.6 percent.

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