Canada Dollar Falls as Jobs Gain Fails to Alter Economic Outlook

  • Loonie extends this quarter’s drop, worst run among G-10 peers
  • Chances for Canada rate cut this year fall to 13%, swaps show

The Canadian dollar fell to a one-week low versus its U.S. counterpart as an above-forecast gain in August jobs wasn’t seen as strong enough to reverse the Bank of Canada’s concern that risks to economic growth have increased.

The currency extended its loss this quarter, the worst performance among Group-of-10 peers, even after a report showed the nation added jobs in August following a surprise decline in July. Crude oil, the nation’s second largest export, fell 2.5 percent, snapping a four-day rally.

“Crude oil is lower and the data will do nothing to alter the BOC’s thinking on the economy,” said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto, adding markets may be under-pricing the risk of an interest-rate cut. “The messaging was clear from the policy statement that risks to the outlook are tilting lower. One month’s data point, however good, does not change that.”

The loonie has weakened in recent days as the BOC acknowledged risks for the nation’s economy, increasing the divergence in monetary policy outlooks between the North American neighbors. In the U.S., Federal Reserve policy makers are considering when to raise interest rates.

The Canadian dollar fell 0.7 percent to C$1.3028 per U.S. dollar at 12:43 p.m. in Toronto, reaching the weakest level since Sept. 2. The likelihood of a BOC rate cut this year was at 14 percent on Friday after rising to a three-week high 20 percent earlier this week, according to data based on overnight index swaps.

The accumulation of bets in favor of easing came after the BOC said Sept. 7 that risks to inflation had “tilted somewhat to the downside” and called into question its long-standing view that exports, particularly in non-commodity industries, would lead the country out of its economic malaise.

Employment rose by 26,200 in August, Statistics Canada said on Friday, exceeding the median estimate of 14,000 in a Bloomberg survey of economists. Jobs creation didn’t keep up with the 42,700 people who entered the labor force last month, so the unemployment rate climbed to 7 percent from 6.9 percent. The increase in August follows an unexpected decline in jobs by 31,200 in July.

“Despite the pick-up in employment, job creation remains subdued and continues to point to weak underlying growth momentum,” David Wagner and Charles St-Arnaud, economists at Nomura International Plc, said in a note. “The BOC will want to wait to assess the impact from the fiscal stimulus and whether the rebound in exports is sustainable before taking any concrete stance as to whether monetary easing is needed this year.”

The Canadian dollar’s decline has been additionally fueled by a drop in crude oil. West Texas Intermediate futures fell to $46.53 a barrel in New York.

“Given how far away the next Bank of Canada is, oil matters more than interest rates right now,” said Greg Anderson, global head of foreign-exchange strategy in New York at Bank of Montreal.

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