Canada’s dollar slumped from almost a six-month high after the economy unexpectedly lost jobs in June, bolstering central-bank Governor Stephen Poloz’s argument that the nation still faces risk from slow growth.
The currency sank for the first time in four days as data showed the unemployment rate rose to 7.1 percent, the highest this year, from 7 percent. Jobs growth since June 2013 was the slowest since February 2010 at 0.4 percent. The report damped bets that rising inflation in April and May would prompt the central bank to acknowledge growth is picking up, diminishing the chance of an interest-rate cut. Policy makers meet July 16.
“We’re sitting with employment growth right now that is modest at best,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia, by telephone from Toronto. “It’s likely to feed the dovish tone coming from Governor Poloz. Having employment still moderate at best would suggest there’s still slack in the economy and inflationary pressures won’t rise.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, depreciated 0.8 percent to C$1.0734 per U.S. dollar at 5 p.m. in Toronto. The currency gained to C$1.0631 before the jobs data. It touched C$1.0621 on July 3, the strongest level since Jan. 6. One Canadian dollar purchases 93.16 U.S. cents.
The currency fell for the first week since June 6, sinking 0.8 percent.
Canada’s government bonds rose, with the yield on benchmark 10-year debt falling three basis points, or 0.03 percentage point, to 2.21 percent. The yield touched 2.18 percent yesterday, the lowest level since June 2013. The price of the 2.5 percent security due in June 2024 increased 23 cents to C$102.56.
The loonie dropped versus all of 31 major peers as Statistics Canada reported that employers eliminated 9,400 jobs last month, compared with a forecast in a Bloomberg survey of economists for a gain of 20,000. The economy added 25,800 positions in May. Economists forecast the unemployment rate would be unchanged at 7 percent.
The report came after investors turned bullish on the Canadian currency this month. Futures bets by hedge funds and other large speculators for the loonie to rise against the U.S. dollar outnumbered bets for it to fall -- called net longs -- by 10,295 contracts on July 8, the most since February 2013, according to data released today by the Washington-based Commodity Futures Trading Commission. Speculators reversed bets from a net-short position the previous week for the first time in 70 weeks.
The Canadian currency rebounded after touching a 4 1/2 year low of C$1.1279 versus its U.S. peer in March, two days after Poloz said he couldn’t rule out an interest-rate cut to head off the risk that low inflation would slip into deflation.
The following month, the consumer-price index increased to the Bank of Canada’s 2 percent annualized inflation target after slumping below the goal for 23 straight months. It reached 2.3 percent in May, the first time above the target since February 2012.
While Poloz said he viewed higher inflation as a temporary phenomenon, speculation that he’d have to change his outlook helped make the loonie the best performer among its Group of 10 peers last quarter.
The prospect of higher interest rates generally strengthens a currency as investors seeking higher returns are drawn to the country. The central bank has held the benchmark rate target at 1 percent since 2010 to support the economy.
“The bank is more vindicated now,” said Greg Moore, chief currency strategist at Royal Bank of Canada, by phone from Toronto. “It adds to the overall argument that he’s been making that the pickup in inflation is potentially temporary and he’s willing to look through it in the near term, and the underlying growth environment is still rather soft.”
The Canadian dollar was the biggest loser this week among the 10 developed-nation currencies tracked by the Bloomberg Correlation Weighted Index, dropping 1 percent. It was the top performer over the past three months, gaining 3.3 percent.
“The message for the Bank of Canada is clear,” David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto, said before today’s report. “They have enough evidence to look through some of the increase in inflation and remain quite cautious because the growth outlook is not as strong as they would have hoped.”