Bloomberg News

Canada Dollar Beats Most Peers Amid Job Gains, Rate Bets

May 12, 2012

Canada’s dollar rose against all of its 16 most-traded peers except the yen and the U.S. dollar after employment climbed, fueling bets the central bank will be the first in the Group of Seven nations to raise interest rates.

The currency pared a weekly loss against its U.S. counterpart after Statistics Canada reported the nation’s biggest two-month job gain in more than 30 years, adding to evidence the nation’s economy is accelerating. Interest-rate speculation may be tempered next week by a report forecast to show the pace of inflation held below the Bank of Canada’s 2 percent target for a second month.

“The Canadian dollar outperformed on the back of the surprising beat on the labor-force survey,” Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “Everybody was leaning left on this thing. To print 58,000 with the vast majority being private-sector, full-time jobs was a massive beat.”

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, gained 0.8 percent this week to C$1.2925 per euro yesterday in Toronto and strengthened 1.2 percent to C$1.0026 to the Australian dollar. It weakened 0.4 percent to C$1.0005 per U.S. dollar, ending the week below parity for the first time since February. 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, sliding to C$1.0063 on May 9 and strengthening to 98 cents on April 27. It will trade at 98 cents at year-end, according to the median forecast in a Bloomberg News survey of 41 economists.

Bonds Rise

Ten-year government bonds rose for a second week, pushing the yield down five basis points, or 0.05 percentage point, to 1.97 percent. It touched 1.93 percent on May 9, the lowest level since Feb. 3. The price of the 2.75 percent securities due in June 2022 increased 46 cents to C$107.11.

Crude oil, Canada’s biggest export, declined for a second week. June futures dropped 2.4 percent to $96.13 per barrel in New York and touched $95.17, the lowest since Dec. 20. Raw materials including oil account for about half of Canada’s export revenue.

The loonie gained as much as 0.7 percent yesterday after the statistics agency said employers added a net 58,200 jobs to payrolls in April, almost six times the median forecast in a Bloomberg survey, after an increase of 82,300 in March. It was the currency’s biggest intraday gain since April 17, when Bank of Canada policy makers said raising interest rates might be necessary as growth and inflation quicken.

Rate Wagers

Private companies added 85,800 workers in April, while public-sector employment fell by 19,200, Statistics Canada said. Full-time employment increased 43,900.

Odds increased after the jobs data that the central bank will boost its 1 percent benchmark interest rate later this year. Bloomberg calculations on trading in overnight index swaps showed about a 42 percent chance the rate will be increased to 1.25 percent after the bank’s Sept. 5 meeting, up from 36 percent yesterday, and a 14 percent chance of a bigger jump. The likelihood was 19 percent on April 16, the day before the central-bank statement.

“It’s a natural progression to think that rate expectations are going to be driven higher” on the jobs numbers, National Bank’s Spitz said. “I don’t know if rate hikes are inevitable. The currency’s valuation will play into it,” he said, meaning a stronger currency may act as a cap on inflation by making the nation’s exports less competitive in international markets.

Inflation Report

Consumer prices in Canada held steady at 1.9 percent in April from a year earlier, economists in a Bloomberg survey forecast before Statistics Canada reports the data on May 18. The inflation rate fell in March below the central bank’s 2 percent target for the first time in 18 months.

Futures traders decreased wagers last week that 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.

The loonie’s advance yesterday trimmed its weekly loss versus the greenback, which gained on demand for safety amid resurgent concern that Europe’s sovereign-debt crisis is worsening.

The Canadian dollar reached C$1.2881 per euro yesterday, the strongest level since Jan. 17, on bets Greece is closer than ever to exiting the euro. A political impasse in the nation where the region’s debt crisis began followed an inconclusive May 6 election and threatened the implementation of austerity pledges required for its two global bailouts since May 2010.

Loonie Versus Aussie

The loonie’s gain against Australia’s dollar, the currency of a fellow commodities exporter, brought it almost to parity yesterday. It touched C$1.0002, the strongest since October.

Canada’s dollar may strengthen 7 percent against its Australian counterpart over the next three to six months, said Shaun Osborne, currency strategist in Toronto at Toronto- Dominion Bank’s TD Securities unit.

“There’s a policy divergence starting to open up between the Reserve Bank of Australia, which is in the early stages of an easing cycle, and everyone seems to be looking at the Bank of Canada to tighten,” Osborne said at the May 8 Bloomberg Canada Economic Summit in Toronto. “There’s an opportunity for the Aussie-Canada cross to catch up with interest-rate differentials.”

The RBA has cut its benchmark interest rate to 3.75 percent from 4.75 percent over the past seven months and this month lowered its growth and inflation forecasts.

Osborne said he entered the trade at C$1.03, with a target for 94 cents over the next three to six months.

To contact the reporter on this story: Chris Fournier in Halifax at cfournier3@bloomberg.net

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


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