Loonie's World-Beating Rally Wanes as Canadian Economy Flags

  • Jobs data on Friday forecast to show more evidence of slowdown
  • `The bulk of the good news is priced in': Scotiabank Osborne

The Canadian dollar’s recent reign atop the developed world’s currency markets appears to have come to an end.

The currency has posted its worst two-day decline in more than a year after data showed that Canada’s trade deficit widened to a record in March, dragged down by a plunge in exports to the U.S., the country’s largest trading partner. With an employment report Friday expected to show job creation also slowed, analysts say the economic momentum that drove the currency’s four-month rally may be set to flag.

“Everyone’s jumped on the bandwagon and as soon as there is any whiff of a turn, people will start to bail out,” said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto. “The collective wisdom has decided there’s not much more juice you can squeeze out of this story for the Canadian dollar here. The bulk of the good news is priced in.”

The currency had surged more than 15 percent this year from a 13-year low in January as the price of oil rebounded and the non-commodity exports the central bank is counting on to drive the recovery began to show signs of life. That strength pushed traders last month to assign higher odds the Bank of Canada would raise rates this year than cut them. Those have now reversed this week to favoring a cut.

Rate Bets

Canada’s merchandise trade deficit unexpectedly widened to a record C$3.41 billion ($2.65 billion) in March, Statistics Canada said Wednesday. The surplus with the U.S., which consumes about three-quarters of Canada’s exports, shrank to C$1.53 billion, the narrowest since 1993. In another sign of slowdown, building permits fell 7 percent  in March from the previous month, according to data from Statistics Canada, compared with forecasts for a 4.8 percent decline.

The loonie, as the Canadian dollar is known, rose 0.5 percent to C$1.2810 per U.S. dollar at 8:48 a.m. in Toronto, after slumping 2.7 percent the two previous days. It is 8.1 percent up this year, the third-best-performer among its Group-of-10 peers, after the yen and the Norwegian krone.

Bets for Canadian monetary tightening this year have all but evaporated and overnight index swaps are now showing a 16 percent probability of an interest-rate cut.

Investors’ attention will now be focused on Canadian jobs figures due at 8:30 a.m. in Ottawa on Friday, with the median of forecasts showing expectations for an increase of 2,000, down from a gain of 40,600 in March.

Crude oil futures rose 4.7 percent to $45.82 a barrel in New York.

“It might be a little bit too early to say the rally is over,” said Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co, who sees the loonie slipping to C$1.35 per U.S. dollar by the end of the year. “But a pullback in oil and weak jobs data on Friday could give fundamental support to the idea that the recovery in the Canadian dollar is done.”

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