Canada Dollar Advances as Jobs Gains Damp Rate-Cut Speculation

The Canadian dollar rose for a second day after job creation rebounded, damping speculation the Bank of Canada will cut interest rates to spur the economy.

The currency gained against all except four of its 16 major peers as Canada added 29,400 jobs in January after losing positions the prior month, and the jobless rate fell. The U.S. added fewer jobs than forecast. Canada’s dollar fell 4.5 percent last month for its worst start to a year since at least 1972 as the Bank of Canada spurred speculation that it may cut interest rates, saying inflation would fall below target this quarter.

“The numbers, particularly the bounce-back in full-time employment, suggest those that were anticipating immediate action and a response from the bank certainly are on the defensive,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, said by phone from London. “We never seriously thought the bank would cut, but clearly the market has been taking those thoughts seriously.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.3 percent to C$1.1032 at 5 p.m. in Toronto after gaining as much as 0.9 percent, the most since Sept. 6. One Canadian dollar buys 90.65 U.S. cents.

Bonds Rise

Canada’s 10-year government bond rose, with yields falling three basis points, or 0.03 percentage point, to 2.41 percent. The 1.5 percent security maturing in June 2023 added 23 cents to C$92.50.

The two-year benchmark bond yield rose above 1 percent -- the level of the Bank of Canada’s benchmark main lending rate -- for the first time in two weeks, before paring gains to trade at 0.98 percent. The yield on the 1.75 percent bond due February 2016 is more closely tied with expectations for the central-bank rate.

Futures of crude oil, Canada’s largest export, climbed 2.2 percent to $100.04 per barrel in New York, the first time above $100 per barrel since Dec. 27. The Standard & Poor’s 500 Index of U.S. stocks rose 1.3 percent.

The cost to insure against declines in the loonie versus its U.S. counterpart slid to the lowest in more than three years. The three-month 25-delta risk-reversal rate fell as low as 0.56 percent, the lowest since November 2010. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Net Shorts

Hedge funds and other large speculators decreased bets the loonie will fall versus its U.S. peer for a second week, data from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the loonie compared with those on a gain -- net shorts -- totaled 60,300 contracts as of Feb. 4, compared to 62,789 positions the previous week, data from the CFTC show.

Implied volatility for three-month options on the U.S. dollar against its Canadian peer fell to 7.3 percent, the lowest in 3 1/2 weeks. The measure is used to set option prices and gauge the expected pace of currency swings. The average in the past 12-months is 6.84 percent.

The loonie extended gains against the dollar after unemployment dropped to 7 percent in January from December’s 7.2 percent, Statistics Canada said in Ottawa. Economists surveyed by Bloomberg News projected the jobless rate would decline to 7.1 percent with a 20,000 payrolls increase, according to median forecasts. Employment fell a revised 44,000 in December.

Full-time employment rose by 50,500 in January and part-time positions declined by 21,100. Employment in services rose by 25,800 and goods-producing companies added 3,600 workers.

‘Snowball’s Chance’

The Bank of Canada kept its main interest rate unchanged on Jan. 22, saying the strength of the country’s dollar was hurting exporters. Governor Stephen Poloz said his next interest-rate move depended on how economic data change the balance of risks to the world’s 11th-largest economy.

Poloz also said the risk of inflation remaining below the midpoint of the central bank’s 1 percent to 3 percent target band has increased. Canada’s inflation rate rose 1.2 percent in December from a year earlier, slower than the 1.3 percent that economists had forecast, Statistics Canada reported Jan. 24.

“The market participants that are pricing in the chance of a rate cut from the Bank of Canada -- that view takes a serious hit,” Brad Schruder, director of foreign exchange at Bank of Montreal, said by phone from Toronto. “That goes from low probability to the snowball’s chance-in-hell probability.”

‘U.S. Disappointment’

The 113,000 gain in U.S. employment followed a revised 75,000 increase the prior month, Labor Department figures showed in Washington. The median forecast of economists in a Bloomberg survey called for a 180,000 advance. The unemployment rate dropped to the lowest level since October 2008 even as more Americans entered the labor force.

The U.S. Federal Reserve has cut its monthly bond-buying by $10 billion at each of its last two meetings, to $65 billion. Economists expect the central bank to continue cutting $10 billion per meeting until ending the program in December, according a Bloomberg survey conducted Jan. 10. The purchases tend to debase the currency.

“That the market has seemingly withstood the U.S. disappointment relatively easily might suggest that people have still just looked at this pull-back in dollar/CAD and used it as a buying opportunity, still on the assumption that the U.S. is going to be recovering somewhat faster than Canada,” CIBC’s Stretch said.

Economic data in February are likely to benefit the Canadian dollar, with inflation stabilizing and domestic activity still strong, Greg Moore, senior currency strategist at Royal Bank of Canada, wrote in a note to clients today.

In the longer-term, slowing capital inflows and a current-account deficit will weigh on the currency, Moore wrote. RBC lowered its year-end forecast to C$1.15 per U.S. dollar and said the currency will slide to C$1.18 by the end of 2015. That compares with median predictions of C$1.10 and C$1.11 in Bloomberg surveys.

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