Loonie Slumps as Record Trade Gap Undercuts Canada Recovery Bets

  • Currency suffers steepest two-day decline since January 2015
  • Trade deficit unexpectedly widened to record in March

Harsh economic reality has caught up with the Canadian dollar’s surge. The loonie is suffering its steepest two-day slide in 15 months as the country’s trade deficit widened to a record in March, fueling concern over the economy’s rebound.

The currency fell 1.1 percent to C$1.2862 per U.S. dollar as of 12:24 p.m. in Toronto, following a slump of 1.5 percent Tuesday. The declines pared the currency’s gain this year to 7.6 percent, dropping it to the third-best-performer among Group-of-10 peers, after the yen and the Norwegian krone.

“The Canadian dollar isn’t helped by awful trade figures,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London, who expects the loonie to weaken to C$1.33 by the end of 2016. “It’s starting to call into question the rebalancing story that many have bought into recently.”

The reversal in the Canadian dollar comes after a rebound in oil and signs of a recovery in the nation’s economy sent the currency as much as 16 percent higher after it reached a 13-year low in January. Further pressuring the loonie, the greenback has gained against major peers the past two days as expectations of U.S. interest-rate increases began to seep back into the market.

Canada’s merchandise trade deficit unexpectedly widened to a record C$3.41 billion ($2.68 billion) in March, Statistics Canada said Wednesday. The surplus with the U.S., which consumes about three-quarters of Canada’s exports, shrank to C$1.53 billion, the narrowest since 1993.

The figures all but erased growing bets for Canadian monetary tightening this year, with overnight index swaps showing almost a 20 percent probability of an interest-rate cut. That’s a turnaround from last week, when the swaps showed a higher probability of rate increases.

One loonie, as the Canadian dollar is known for the aquatic bird on the C$1 coin, buys about 77.70 U.S. cents. Crude oil futures gained in New York, trading at $43.80 a barrel.

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