Canadian Currency Strengthens as Economy Shrinks in Line With Forecasts

The Canadian dollar gained for the first time in four days against its U.S. counterpart after data showed the nation’s economy contracted in July, in line with economists’ forecasts.

The currency advanced against all 16 of its most-traded counterparts as Canada’s gross domestic product shrank 0.1 percent after gaining 0.2 percent in June, the government said. It was the first drop since August 2009. Economists predicted a 0.1 percent decline, and Finance Minister Jim Flaherty said yesterday the data might be negative.

“After comments from the finance minister yesterday, the market had priced in poor numbers for Canadian GDP,” Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia’s Scotia Capital unit, said via e-mail. “Coming in on expectations is actually a bit of a relief to the market, so initial reaction is a stronger Canadian dollar.”

Canada’s currency, nicknamed the loonie, appreciated 0.8 percent to C$1.0245 per U.S. dollar at 9:48 a.m. in Toronto, from C$1.0326 yesterday. One Canadian dollar purchases 97.61 U.S. cents.

Traders are trimming bets that economic growth will be strong enough for Bank of Canada Governor Mark Carney to raise borrowing costs at a fourth consecutive policy meeting next month because the U.S. economy, consumer of about three-quarters of Canadian exports, remains fragile. The U.S. said today its economy grew at a 1.7 percent annual rate in the second quarter, compared with a 3.7 percent pace in the first quarter.

‘Limits’ on Divergence

The Federal Reserve said last week it’s “prepared to provide additional accommodation” to spur U.S. growth. Carney said later in a speech there are “limits” to how far monetary policy in the two countries can diverge.

Probabilities of a quarter percentage-point increase at the Oct. 19 Bank of Canada meeting stood at 18 percent today, down from 40 percent two weeks ago, according to Bank of Nova Scotia data derived from overnight index swaps. Bank of Montreal pegged the odds of an October rise at 20 percent.

“This morning’s number will not likely add to any” expectations for an increase, Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “It may even take away from some of the pricing-in that’s already in the market. I see it as confirming the market’s overall bias against a rate hike in October.”

Canada’s government bonds fell, pushing the 10-year note’s yield 3 basis points higher, or 0.03 percentage point, to 2.77 percent. The price of the 3.5 percent security maturing in June 2020 dropped 26 cents to C$106.19.