Canadian Currency Weakens Most in Six Months on Rate Prospects

The Canadian dollar lost the most in a week since June as increasing evidence the economy is faltering added to speculation the Bank of Canada will signal it may cut interest rates this year.

The currency sank against all of its 16 major peers as employment unexpectedly fell in December. It touched a four-year low against the U.S. dollar. Canada’s trade deficit swelled to nine times what economists forecast, fueling concern the country may not be able to rely on exports to boost growth. Crude oil, the nation’s biggest export, fell. The central bank will release surveys next week on business sentiment and credit conditions.

“The Canadian dollar was the big mover and the big underperformer among Group of 10 currencies this week,” said Greg Anderson, head of G-10 currency strategy at Bank of Montreal, by phone from New York. “Commodity-price weakness and economic malaise in Canada, along with a policy preference for a weaker currency, had the market looking to short Canada dollar.” Shorting is betting that an asset will fall in value.

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, depreciated 2.4 percent to C$1.0892 per U.S. dollar this week in Toronto. It was the biggest weekly loss since June 21. The loonie touched C$1.0946, the weakest level since October 2009. One Canadian dollar buys 91.81 U.S. cents.

Government bonds climbed for a second week, pushing yields on Canada’s benchmark 10-year security down 19 basis points, or 0.19 percentage point, to 2.56 percent. It was the biggest weekly drop since the five days ended Dec. 16, 2011. The yields touched 2.55 percent, the lowest since Nov. 29. The price of the 1.5 percent debt due in June 2023 rose C$1.53 to C$91.25.

Attraction Dims

The yield on two-year government bonds, more closely tied to short-term rate expectations, fell 12 basis points to 1.02 percent, the biggest weekly decline since March. That shrank the securities’ yield advantage over comparable U.S. Treasuries to 65 basis points, the least since June 2012, dimming the relative attraction of Canadian-dollar-denominated securities.

Bank of Canada Governor Stephen Poloz surprised investors in October by dropping language from a policy statement about the need for future interest-rate increases, citing slack in the economy. The language had been in place for more than a year.

The central banker said in a Dec. 17 interview with Bloomberg News that inflation, which has been below 2 percent since May 2012, has been “lower than we can explain” while exports and investment have been disappointing.

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.

‘Easing Bias’

Yields on June 2014 bankers’ acceptance contracts fell to 1.18 percent yesterday, the lowest level 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.

“January is possible for the Bank of Canada moving to an easing bias,” Evan Brown, foreign-exchange strategist at Morgan Stanley, said yesterday by phone from New York. “How broad-based the job losses were was definitely a surprise. We were in no way expecting it to be as bad as it was. A great deal of losses came in full-time employment.”

Net employment in Canada fell in December by 45,900 jobs, its first decline since July, Statistics Canada data showed yesterday. The jobless rate jumped to 7.2 percent, taking it above the U.S. jobless measure for the first time since 2008. Economists surveyed by Bloomberg News projected a 14,100-job increase and an unchanged unemployment rate of 6.9 percent.

Since 2011

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

The jobs data followed reports this week showing the country’s trade deficit swelled to C$940 million ($863 billion) in November, nine times what economists had forecast. Western University said its Ivey purchasing-managers index fell to 46.3 in December, the lowest since May 2009. Economists had projected an increase from the November reading of 53.7.

“Everybody is all over Canada dollar at the moment, that’s kind of the trade du jour,” Richard Franulovich, chief currency strategist for the northern hemisphere at Westpac Banking Corp. in New York, said Jan. 9 in a phone interview.

The Bank of Canada’s next policy decision is scheduled for Jan. 22. It will release on Jan. 13 a survey of executives on business sentiment in the fourth quarter and another of senior lending officers on credit conditions in the same period.

Commodities Fall

Crude oil futures fell for a second week, losing 1.3 percent to $92.72 a barrel in New York and touching $91.24, the lowest since May. Standard & Poor’s GSCI Index of 24 raw materials also dropped for a second week, declining 0.7 percent.

The loonie has dropped 2.2 percent this month among the 10 developed nation currencies tracked by the Bloomberg Correlation-Weighted Index, the worst performance. The U.S. dollar strengthened 0.6 percent.

The greenback fell yesterday versus most major counterparts as lower-than-forecast job gains damped speculation the Fed will keep winding down the bond-buying it uses to spur economic growth. Policy makers cut the monthly bond purchases to $75 billion in January, from $85 billion, amid an improving economy. They said they may take further “measured steps” depending on economic progress.

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 unemployment rate fell to 6.7 percent, from 7 percent, as more people left the labor force.

‘Bad News’

The loonie weakened for the past five days, the longest losing stretch since August.

“One of the strongest consensus views for the year ahead is Canadian-dollar underperformance, and the market seems to have a particular appetite for bad news at the moment,” Adam Cole, head of Group of 10 currency strategy at Royal Bank of Canada, said Jan. 8 by telephone from London. “The market is now priced for at least some risk of a rate cut in the early part of the year.”