Canada’s Dollar Falls Most Since 2011 as Economy Shrinks

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Canada’s dollar weakened the most since 2011 after a report showed the economy shrank in August for the first time this year, adding to bets the central bank will lag behind the Federal Reserve in raising interest rates.

The currency approached a five-year low after the unexpected decline in growth contrasted with data yesterday showing the economy in the U.S., the nation’s largest trading partner, expanded more than forecast in the third quarter. The Fed ended a bond-purchase stimulus program this week, moving a step closer to raising U.S. interest rates, while the Bank of Canada left its benchmark rate unchanged this month.

“The market’s been betting on who is going to be hiking first and what’s going to be the difference between them,” said Jane Foley, senior currency strategist at Rabobank International, by phone from London. “Today the loonie has weakened because of the weaker Canada data, which suggests that maybe the Bank of Canada will be going after the Fed.”

The loonie, as the Canadian dollar is called for the image of the aquatic bird on the C$1 coin, depreciated 0.7 percent to C$1.1266 per U.S. dollar at 5 p.m. Toronto time in a third daily loss. It slid as much as 1.3 percent to C$1.1333 in the biggest intraday drop since December 2011. The currency touched C$1.1385 on Oct. 15, the weakest since July 2009. One loonie buys 88.76 U.S. cents.

The Canadian dollar fell 0.3 percent this week and lost 0.6 percent in October. It has declined this year against most major peers, dropping 5.7 percent.

Government Bonds

Canada’s benchmark 10-year government bond was little changed, yielding 2.05 percent. The price of the 2.5 percent debt maturing in June 2024 was C$103.93. The 10-year yield rose three basis points this week, or 0.03 percentage point. The five-year security yielded 1.54 percent.

The U.S. dollar gained versus all of its 16 major counterparts today, climbing to a seven-year high against the yen, after the Bank of Japan unexpectedly increased monetary stimulus. The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 peers, advanced 1 percent to 1,080.84 and reached 1,082.92, the highest on a closing basis since June 2010.

Canada’s gross domestic product shrank 0.1 percent to an annualized C$1.63 trillion ($1.45 trillion), the nation’s statistics agency reported today in Ottawa. Economists in a Bloomberg survey forecast that output would be little changed from July.

‘Bit Softer’

“GDP was definitely a little bit softer than the market had thought,” David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit, said by phone from Toronto.

A government report on Nov. 7 will show Canada lost 7,500 jobs in October, economists in a Bloomberg survey forecast. Employers added 74,100 positions in September.

U.S. gross domestic product grew at a 3.5 percent annualized rate in the three months ended September after a 4.6 percent gain in the second quarter, Commerce Department figures showed yesterday in Washington. It marked the strongest back-to-back readings since the last six months of 2003.

The loonie gained last week after the Bank of Canada removed the word “neutral” from its outlook on where interest rates would go next, fueling bets officials are more open to raising borrowing costs. Policy makers maintained the benchmark rate target at 1 percent, where it has been since 2010.

The U.S. central bank said Oct. 29 it will end a bond-buying program that has added $1.66 trillion to its balance sheet, citing “solid job gains and a lower unemployment rate.” Most Fed officials expect to raise the key U.S. interest-rate target next year for the first time since 2006, according to projections released last month. It has been held in a range of zero to 0.25 percent since 2008.

Bearish Bets

Bets against the loonie by hedge funds and other large speculators outnumber those in its favor by almost the most in four months. Futures wagers for the currency to weaken against its U.S. peer outnumbered bets going the other way by 21,405 contracts on Oct. 28, according to data today from the Washington-based Commodity Futures Trading Commission. They totaled 21,534 a week earlier, the most since June.

Net positions on a gain by the Canadian currency reached an 18-month high in August, before swinging against it this month.

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