Canadian Dollar Declines as Wider Trade Deficit Undercuts Growth

Canada’s dollar declined versus its U.S. peer as the nation’s merchandise trade deficit widened in April, boosting speculation economic growth will lag behind that in its largest trading partner.

The currency dropped against the majority of its most-traded peers as Canada recorded its 16th straight trade deficit, the longest run in at least a quarter century. The Canadian dollar posted its biggest gain in almost a year yesterday as a manufacturing slowdown in the U.S. damped speculation the Federal Reserve will reduce stimulus that tends to devalue the currency. A report June 7 is forecast to show Canada’s unemployment rate held unchanged in May.

“We’ve got an emerging U.S. economic-strength story that’s propelling the U.S. dollar higher across the board,” Mark Frey, chief market strategist at Cambridge Mercantile Group, a global foreign exchange and payments provider, said by phone from Victoria. “Canada is being punished by some relative under-performance from a domestic standpoint.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.6 percent to C$1.0342 per U.S. dollar at 5 p.m. in Toronto. The currency added as much as 1.1 percent yesterday, the most since June 29, 2012. One loonie buys 96.69 U.S. cents.

Bonds, Oil

Canada’s benchmark 10-year government bonds fell, with yields rising three basis points, or 0.03 percentage point, to 2.09 percent. The 1.5 percent security maturing in June 2023 lost 29 cents to C$94.78.

Futures on crude oil, Canada’s largest export, added 0.4 percent percent to $93.83 per barrel in New York after gaining as much as 1 percent and falling 1.1 percent. The Standard & Poor’s 500 Index of U.S. stocks lost 0.6 percent.

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart traded at 7.85 percent, near the 7.89 percent reached May 22, the highest point in almost a year. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

“This is just a rebound,” Jane Foley, senior currency strategist at Rabobank International, said by phone from London. “The market now is really on the cusp of trying to decide whether the Fed is going to taper soon or whether it’s not. Our view is that the Fed probably won’t taper until later in the year, meaning the market probably is overexcited and probably has gotten ahead of itself.”

‘Contained’ Market

The Fed has been buying $85 billion a month in bonds to bolster growth and cut unemployment, with policy makers pledging to keep interest rates near zero as long as joblessness is above 6.5 percent and inflation is no more than 2.5 percent.

U.S. data will show 168,000 new jobs created in May, up from 165,000 the previous month, leaving the unemployment rate at 7.5 percent, Bloomberg surveys show before the June 7 data.

“The market will be fairly contained until we get nonfarm payrolls,” said Dean Popplewell, head analyst in Toronto at the online currency-trading firm Oanda Corp., referring to the U.S. payroll numbers. “If you get some weak numbers this Friday, Canada will underperform. But probably not as much in regards to some of the cross currencies.”

Canada’s jobless rate remained at 7.2 percent in May while the nation added 15,000 new jobs compared to 12,500 new positions the month before, according to separate surveys.

The trade deficit of C$567 million ($550 million) followed a C$3 million shortfall in March that Ottawa-based Statistics Canada originally reported as a C$24 million surplus. The Bank of Canada has said the export recovery is the slowest since World War II and on May 29 kept its key interest rate at 1 percent, where it’s been for more than two years.

The loonie has lost 0.8 percent in the past month against nine other developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The Australian dollar lost 5.2 percent and New Zealand’s currency dropped 4.7 percent to lead decliners. The U.S. dollar led gainers, adding 2.1 percent.

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