Canadian Currency Reaches 4-Year Low as Jobs Data Fuel Rate Bets

Canada’s dollar touched to a four-year low as the nation’s jobless rate unexpectedly rose, led by the largest drop in full-time work since 2011, adding to bets the central bank may consider cutting interest rates.

The currency declined for a fifth day, the longest losing streak since August, as the Canadian unemployment rate reached 7.2 percent in December, taking it above the U.S. jobless measure for the first time since 2008. Employment in America, the nation’s biggest trade partner, grew less than forecast. Bank of Canada Governor Stephen Poloz said this week he has “some room to maneuver” on interest rates.

“The Bank of Canada is definitely on hold on the back of that one,” said Sebastien Galy, senior foreign-exchange strategist at Societe Generale SA, by phone from New York. “It has all the right elements for the Bank of Canada to maintain a very dovish message and kind of implicitly encourage the Canadian dollar to weaken.”

The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, depreciated 0.5 percent to C$1.0892 per U.S. dollar at 5 p.m. in Toronto. It reached C$1.0946, the weakest since October 2009. One Canadian dollar buys 91.81 U.S. cents.

Canada’s currency sank versus all of its 16 major peers. It has lost 2.4 percent this week, the most in six months.

Implied volatility for three-month options on the U.S. dollar against its Canadian counterpart increased to a five-week high. The measure, which is used to set option prices and gauge the expected pace of currency swings, reached 7.32 percent, the most since Dec. 5. It touched a four-week low of 6 percent on Dec. 18. The 2013 average was 6.67 percent.

Net Shorts

Futures traders increased bets for the first time in three weeks that the loonie will fall against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in Canada’s dollar compared with those on a gain -- so-called net shorts -- was 60,542 on Jan. 7, compared with net shorts of 57,956 a week earlier.

Government bonds climbed, pushing yields on Canada’s benchmark 10-year security down 13 basis points, or 0.13 percentage point, to 2.56 percent. They touched 2.55 percent, the lowest level since Nov. 29. The price of the 1.5 percent debt due in June 2023 advanced 98 cents to C$91.25.

Yield Spread

The yield on two-year government bonds, more closely tied to short-term rate expectations, fell as much as nine basis points to 1.01 percent, the lowest level since May. The drop reduced the securities’ yield advantage over comparable U.S. Treasuries to 65 basis points, the narrowest since June 2012, reducing the relative attractiveness of Canadian-dollar-denominated securities.

Yields on June 2014 bankers’ acceptance contracts fell to 1.19 percent, the lowest since they started trading in June 2011. The decline suggests investors are seeing more likelihood of a cut in the Bank of Canada’s benchmark interest-rate target.

The central bank’s next interest-rate decision is scheduled for Jan. 22.

“A soft easing bias being communicated in the January statement is on the table,” Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal, said by telephone from New York. “An easing by mid-summer? Yeah, it’s a possibility now.”

Net employment in the nation fell by 45,900 jobs, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News projected a 14,100-job increase and an unchanged unemployment rate of 6.9 percent, according to the median forecasts.

Full-time employment declined by 60,000 workers, the most since October 2011, while part-time positions rose by 14,200, the data showed.

Trade Deficit

The jobs data followed reports this week showing the country’s trade deficit swelled in November to nine times what economists forecast and a purchasing-managers index slid in December to a four-year low. Canadian inflation fell below the central bank’s target range of 1 percent to 3 percent in October and November and has been below 2 percent since May 2012.

Canada’s dollar tumbled 6.6 percent in 2013, its biggest drop in five years, as accelerating economic growth in the U.S. convinced the Federal Reserve to start slowing monetary stimulus even as the Bank of Canada warned of deflationary risks. In a Dec. 17 interview with Bloomberg News, Poloz said inflation has been “lower than we can explain” while exports and investment have been disappointing.

Maneuvering Room

Poloz said in an interview broadcast Jan. 7 by the Canadian Broadcasting Corporation that while he plans to keep interest rates on hold, there’s room to cut them if necessary. He said he’s under no pressure to raise rates.

The greenback fell versus most major peers today as lower-than-forecast job gains damped speculation the Fed will keep winding down the bond-buying it uses to spur economic growth.

U.S. payrolls rose by 74,000 jobs in December, less than half the 197,000 projected in a Bloomberg survey and the least since January 2011. The data followed a revised 241,000 advance the prior month, Labor Department figures showed. The unemployment rate fell to 6.7 percent, from 7 percent, as more people left the labor force.

The loonie declined 2.7 percent this week among the 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. It was one of only two currencies on the index to fall. The U.S. dollar slipped 0.1 percent.