Bloomberg News

Canadian Dollar Gains Most in Three Weeks After Payrolls Climb

May 11, 2012

Canada’s dollar gained the most in three weeks versus its U.S. counterpart after employment climbed in April almost six times faster than economists forecast, buoying the case for the central bank to raise interest rates.

The currency reversed an earlier decline that took it to almost a three-month low and pared a loss for the week. It rose against all of its 16 most-traded peers tracked by Bloomberg after Statistics Canada said payrolls grew over the past two months by the most in 30 years.

“This really removes the pressure on the Canadian dollar,” Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal’s BMO Capital Markets unit, said in a telephone interview. “The market was very poorly positioned. The shockingly strong number has really whipped the market the other way.”

Canada’s dollar, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, appreciated 0.2 percent to C$1.0005 cents per U.S. dollar at 5 p.m. in Toronto. It strengthened as much as 0.7 percent, the biggest intraday jump since April 17, after weakening earlier as much as 0.3 percent to C$1.0054. The loonie lost 0.5 percent on the week. One Canadian dollar purchases 99.95 U.S. cents.

The currency has traded within a three-cent range versus the greenback since the end of January, siding to C$1.0063 on May 9 and strengthening to 98 cents on April 27.

Reversed Losses

The Canadian dollar pared gains after Evangelos Venizelos, leader of Greece’s Pasok party, failed to form a unity government and will hand back the three-day mandate to President Karolos Papoulias tomorrow. Greek political leaders negotiated for a fifth day on forming a new government after voters in weekend elections revolted against austerity measures, fueling bets Europe’s debt crisis will worsen.

The loonie weakened earlier today as stocks and commodities fell after JPMorgan Chase & Co. reported a $2 billion trading loss and China’s industrial output unexpectedly slowed last month, increasing the least since 2009.

The currency reversed losses after Statistics Canada reported that employment rose by 58,200 jobs following a March jump of 82,300 that was the biggest since September 2008. The labor force grew by 72,500, lifting the unemployment rate to 7.3 percent from 7.2 percent.

Economists surveyed by Bloomberg News had projected a gain of 10,000 jobs and a 7.3 percent jobless rate, according to the median forecasts.

“This is probably going to get the market thinking about Bank of Canada rate-hiking coming through sooner rather than later,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank.

Rate Bets

Investors increased bets after the jobs report that the central bank will raise its benchmark interest rate from 1 percent later this year. Trading in overnight index swaps showed about a 42 percent chance the rate will be boosted to 1.25 percent after the bank’s Sept. 5 meeting, up from 36 percent yesterday. Today’s data also show about a 45 percent chance the rate will be unchanged in September.

The likelihood the BOC will increase borrowing costs by September dropped after a report last week showed employers in the U.S., the nation’s biggest trade partner, added the fewest workers in six months during April. Chances had surged earlier after policy makers on April 17 suggested rates would go up sooner than economists expected as slack in the economy evaporated. Odds of a rise were 75 percent on April 27, according to Bloomberg calculations on overnight index swaps.

The Bank of Canada has kept its overnight lending rate target unchanged since September 2010.

Bonds Fall

Government bonds due in less than seven years fell today, pushing yields on two-year securities up six basis points, or 0.06 percentage point, to 1.3 percent. Yields on 10-year notes decreased two basis points to 1.97 percent after rising three basis points earlier to 2.02 percent.

The loonie gained even as crude oil, Canada’s biggest export, traded at almost the lowest level this year. June futures dropped 1.5 percent to $95.61 a barrel in New York after touching $95.17 on May 9, the weakest since December. The Standard & Poor’s 500 Index was up as much as 0.6 percent and fell as much as 0.7 percent.

The Canadian dollar rose 1.5 percent over the past month versus nine developed-nation counterparts monitored by Bloomberg Correlation-Weighted Indexes. The U.S. dollar advanced 1.2 percent, while the euro fell 0.5 percent.

“I think the Canadian dollar will be quite comfortable trading close to parity, with the possibility of taking out the 99.20 level,” BMO’s Jespersen said.

Wagers on Loonie

Futures traders decreased wagers the Canadian dollar will gain against the U.S. currency. Net long positions, or bets the currency will strengthen, declined to 60,095 contracts in the week ended May 8, after reaching 70,223 the previous week, the highest since March 2011, Commodity Futures Trading Commission data showed.

Canada’s currency is poised to rally against the greenback after failing to depreciate through a pivotal price level, according to JPMorgan.

The loonie’s inability to close weaker than C$1.0055 per dollar twice this week, after reaching C$1.0063 on an intraday basis on May 9, signals it will strengthen, Niall O’Connor, a technical analyst at the firm, wrote in a client note.

“Canada has held important levels for the second time this week, suggesting that a deeper pullback in the move is ready to develop,” New York-based O’Connor said in a telephone interview. “Canada is exhibiting bullish economic fundamentals relative to the U.S. and commodity currencies that are giving it safe-haven status.”

To contact the reporter on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net.


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