Loonie Advances as Canadian Growth Tops Forecasts on Oil Rebound

  • Gain adds to biggest weekly increase in six weeks for loonie
  • Outlook for currency remains bleak, CIBC and Scotiabank say

The Canadian dollar rose after the country’s gross domestic product increased more than economists expected in July, led by a rebound in oil and gas production.

The currency advanced 0.3 percent to C$1.3107 against its U.S. counterpart at 10:04 a.m. in Toronto, curbing its loss this quarter to 1.4 percent, the worst performance among Group-of-10 peers behind the British pound and the Swedish krona. The loonie is on pace for its biggest weekly gain since mid-August, trading at 76.28 U.S. cents.

Faster-than-expected growth and a rally in crude oil this week bring some relief for the Canadian dollar, which has been hit by worries over the longer-term outlook for the country’s economy.

The report pushed derivatives traders to trim bets for monetary easing. The likelihood for an interest-rate cut this year fell to 15 percent on Friday from 21 percent on Thursday, according to Bloomberg data based on overnight index swaps. The bank’s next announcement is on Oct. 19.
 
“The GDP report looks like an oil story mainly - a rebound in output after the Alberta fires” near Fort McMurray, said Shaun Osborne, chief foreign-exchange strategist at Bank of Nova Scotia in Toronto. He sees “more downside than upside risk” for the Canadian dollar. “The policy focus seems to be shifting from growth and the Fort Mac impact to persistently slow growth overall and the risk of inflation undershooting.”

West Texas Intermediate for November delivery rose 0.4 percent to $48.04 per barrel on the New York Mercantile Exchange. It extended its three-day rally to 7.5 percent after the Organization of Petroleum Exporting Countries announced it would reduce production to a range of 32.5 million to 33 million barrels a day.

Canada’s output climbed 0.5 percent from the prior month, Statistics Canada said Friday from Ottawa. The median forecast in a Bloomberg economist survey was for a 0.3 percent increase. Growth was led by a 5 percent expansion in the energy industry.

Hedge funds and other large speculators have been betting in the loonie’s favor since April, according to net-positioning data from the Commodity Futures Trading Commission. The Canadian dollar will weaken to C$1.32 against its U.S. counterpart by the end of the year, according to forecasts compiled by Bloomberg.

Canada’s main inflation rate decelerated to a 10-month low of 1.1 percent in August from 1.3 percent in the month prior, while core inflation, which measures consumer prices excluding eight volatile items, slowed to a two-year low of 1.8 percent from July’s 2.1 percent, Statistics Canada said last week. Both readings lagged the lowest forecasts in Bloomberg economist surveys, and analysts predicted overall prices would accelerate on the month instead of slowing.

“A firm result today was reflective of catch-up in the oil and gas sector, but there are still risks to the upside” ahead of the U.S. election, said Bipan Rai, a senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce in Toronto. He expects the currency to weaken to 1.37 per U.S. dollar by the end of the year.

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