Canada Dollar Falls Most in 1st Half Since 1984 as Growth Trails

Canada’s dollar had its biggest first-half drop in three decades amid signs the nation’s economic recovery is trailing that of the U.S., where talk of reducing central-bank asset buying has made the greenback the world’s strongest currency this year.

Slowing growth in Canada’s gross domestic product reported yesterday extended the currency’s weekly, monthly, quarterly and yearly declines. It has dropped 2.9 percent since June 18, the day before the U.S. Federal Reserve signaled it will scale back this year extraordinary stimulus measures that tend to debase the greenback. Canada’s economy is forecast to lose jobs in June after adding the most positions in more than a decade the previous month.

“It’s a continuation of U.S. dollar strength all around, and the story for the Canadian dollar, as well,” John Curran, a senior vice president at CanadianForex Ltd., an online foreign-exchange dealer, said in a phone interview. “GDP did nothing to inspire trading.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, had fallen 5.7 percent this year to C$1.0519 per U.S. dollar Toronto, the biggest half-year drop since a 5.8 percent fall in 1984. One loonie buys 95.07 U.S. cents.

Curran said the recent drop may extend to C$106.50 this month.

The currency declined 0.6 percent this week, 1.2 percent this month and 3.3 percent this quarter.

Economy Underperforms

Crude oil, the nation’s largest export, has gained 5.2 this year to $96.56 a barrel in New York. The Standard & Poor’s 500 Index of stocks has added 13 percent.

Benchmark 10-year government bonds fell on the year, with yields rising 64 basis points, or 0.64 percentage point, to 2.44 percent.

Canada’s economy underperformed that of the U.S. last year for the first time since 2006, a trend that’s forecast to continue for the next three years. In 2013, Canada’s growth is forecast at 1.7 percent, compared with 1.9 percent in the U.S., according to the median estimates of separate Bloomberg surveys.

Canada’s output rose 0.1 percent to an annualized C$1.57 trillion ($1.50 trillion) in April compared with a 0.2 percent gain the previous month, Statistics Canada said in Ottawa yesterday.

Canada’s economy is forecast to have lost 5,000 jobs this month, according to the median of 17 estimates in a Bloomberg survey due July 5, after adding 95,000 in May.

‘Muddling Along’

“The Canadian economy is still muddling along, trying to reach 2 percent growth,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said by phone from Toronto yesterday. “It leaves us driven by global trends and sentiment, and the general outlook for the U.S. dollar.”

Signs of faster growth in the U.S. emboldened the Fed to set a timetable for the end of quantitative easing. In comments to reporters June 19, Chairman Ben S. Bernanke said the central bank could start reducing the $85 billion monthly pace of bond purchases later this year and end the purchases in the middle of 2014, assuming that the economy meets the Fed’s forecasts.

Spillover from the U.S. recovery will work to Canada’s benefit despite leading to relative weakness of its currency, according to policy makers.

Poloz’s View

In his first public speech since taking office at the start of June, Bank of Canada Governor Stephen Poloz said stronger U.S. demand for Canada’s exports is critical. Poloz, the former head of the government export-financing agency, is expected to favor a weaker currency to help nurse an export-led economic recovery in Canada.

“The underlying driver is an ongoing U.S. recovery, and net-net that’s actually a positive for risk sentiment,” Emanuella Enenajor, an economist at CIBC World Markets, said by phone from Toronto yesterday. “As long as we have the reality of an ongoing recovery, it favors risk-taking and more exposure to commodity levered currencies.”

Enenajor said CIBC’s forecast for the Canadian dollar is to hold steady at about C$1.05 per U.S. dollar through the second half of the year.

Futures traders decreased their bets that the Canadian dollar will decline against the U.S. dollar to the least since February, figures from the Washington-based Commodity Futures Trading Commission show.

Net Shorts

The difference in the number of wagers on a decline in the loonie compared with those on a gain -- so-called net shorts -- was 10,638 on June 25, compared with net shorts of 26,087 a week earlier.

The loonie’s 14-day relative strength index against the dollar was at 67.2 yesterday after touching 70 on June 25, the level that some traders see as a signal an asset has risen too far, too fast and may be due to reverse course.

“Volatility has flushed out quite a few positions recently -- people will be less likely be short the Canadian dollar at these levels,” Curran said. “It’s fallen so much so quickly.” A short position is a best an asset will decline in value.

Canada’s dollar represented 1.57 percent of the $6.05 trillion in official foreign-exchange reserves in the first quarter, according to the International Monetary Fund’s first data on global holdings of the currency.

The share of Canadian holdings in the January-March period was higher than the 1.48 percent share in the final three months of 2012, the IMF report showed. Yesterday’s figures for the first time specified official reserves of the Canadian dollar, as well as its Australia peer, which previously had been indistinguishable in the “other currencies” category of the IMF’s quarterly report.

The loonie is down 0.3 percent this year against nine developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The dollars of Australia and New Zealand, fellow commodities exporters, have dropped 7.8 percent and 1.4 percent. The greenback added 6.4 percent to lead gainers.