Canadian Dollar Falls Most in 7 Weeks as U.S. Shutdown Persists

Canada’s dollar fell the most in seven weeks as politicians in the U.S., its largest trading partner, struggled to end a stalemate on agreements to fund the government and raise the nation’s debt limit.

The currency, nicknamed the loonie, touched a one-month low as crude oil, the nation’s largest export, declined and a report showed Canada’s trade deficit widened in August as imports rose to a record. A report on Oct. 18 is forecast to show consumer prices rose 1 percent in September from a year earlier, the low end of the Bank of Canada’s target band.

“The weakness in the loonie reflects the uncertainty regarding the U.S. shutdown, and the possible economic implications it may have for the Canadian economy,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc., by phone from Toronto. “The market has been optimistic about resolution, but until the uncertainty is cleared up the Canadian currency will show stress.”

The loonie fell 0.5 percent this week to C$1.0349 in Toronto, the biggest decline since the five days ended Aug. 23. The currency reached C$1.0420 on Oct. 10, the weakest level since Sept. 9. One Canadian dollar buys 96.62 U.S. cents.

Moving Averages

The currency traded weaker than its 50-, 100- and 200-day moving averages for a third day yesterday, a signal to some traders that there’s momentum for further losses. It was stronger than all three as recently as Sept. 19.

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart fell to 6.07 percent, the least since May 9. Implied volatility is used to set option prices and gauge the expected pace of currency swings.

The nation’s benchmark 10-year government bond yields were little changed at 2.59 percent. The 1.5 percent securities maturing in June 2023 traded at C$90.76.

Canada plans to auction C$3.3 billion ($3.2 billion) of two-year notes on Oct. 16, according to the Bank of Canada website.

The loonie strengthened yesterday as a report showed Canada added 11,900 jobs in September and the unemployment rate fell to 6.9 percent. Economists surveyed by Bloomberg News projected a 10,000 job increase and an unchanged jobless rate at 7.1 percent, according to the median forecasts.

Report Moves

“The data was much better than expected, which has caused a knee-jerk reaction,” Jack Spitz, managing director of foreign exchange in Toronto at National Bank of Canada, said in a telephone interview. “While the number was strong, the market is still more impacted by what’s going on in Washington than what’s going on in Ottawa, and is still seeking clarity.”

House Republicans offered a plan yesterday to raise the U.S. debt limit and end a partial government shutdown that would require the president to accept policy conditions attached to a spending measure, said two congressional aides.

Canada’s trade deficit unexpectedly widened for a second month in August, outweighing exports to the U.S. that reached the highest since the end of 2011.

The August deficit increased to C$1.31 billion and July’s shortfall was raised to C$1.19 billion from an initial C$931 million, Statistics Canada said Oct. 8 in Ottawa. The deficit exceeded all 20 economist forecasts in a Bloomberg survey that had a median estimate of C$700 million.

Central Bank

The Bank of Canada will raise rates next year, according to a survey of economists that diverges from market gauges.

The central bank policy rate will climb to 1.25 percent from 1 percent in the fourth quarter of 2014, according to the median estimate in a Bloomberg October Canada Economic survey, which had 19 responses. The forecast contrasts with trading in overnight index swaps yesterday that put the odds of a rate increase in 2014 at less than half.

Bank of Canada Governor Stephen Poloz said yesterday his country’s economic growth has been disappointing and is showing gradual signs of regaining momentum. Gross domestic product must expand faster than 2.5 percent to reduce the slack in the economy, Poloz said at a news conference following Group of 20 meetings in Washington.

Canada’s jobless rate fell to the lowest in almost five years in September as 21,400 workers aged 15 to 24 left the labor force. Jobs creation slowed to 11,900 in September from 59,200 in August.

“The overall theme of the Canadian labor market is one of a slow march higher where the lackluster pace is symbolic of the economy’s slow-go trajectory,” said Adrian Miller, director of fixed income strategies at GMP Securities LLC in New York. ”We look for the BOC to remain on the sidelines at least through fourth quarter of 2014 and perhaps even first quarter 2015 before we see a hike in rates.”

Crude-oil futures slid 2 percent this week to $101.74 a barrel on the New York Mercantile Exchange. The price spread between Western Canada Select oil and West Texas Intermediate was $29.50 yesterday, compared with this year’s average discount of $22.57.

The Canadian dollar has lost 1.9 percent this year against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar gained 2.8 percent.

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