The Canadian dollar weakened to a two-week low against its US counterpart on Friday as Canada's labour market stalled, while a raging wildfire in Alberta weighed on the country's economic outlook. Canada lost 2,100 jobs in April as the oil-rich province of Alberta shed still more jobs in its natural resources sector. Economists had forecast that the labour force would be unchanged after a strong gain in March.
"The details were on the weak side," said Doug Porter, chief economist at BMO Capital Markets, including a another big decline in manufacturing employment. Economists say production cuts in Alberta's oil sands due to a raging wildfire may bring Canadian economic growth to a standstill in the second quarter, leaving the central bank on the sidelines and weighing on the Canadian dollar. Both RBC and Bank of America-Merrill Lynch slashed their second-quarter growth forecasts on Friday to 0.5 percent and 0.6 percent, respectively. That will mark a substantial slowdown from the near 3 percent that is expected for the first quarter.
Although less production should boost oil prices, which will lift the Canadian dollar, that will likely be offset by the weaker economic fundamentals, said Scott Smith, senior market analyst at Cambridge Global Payments. The Canadian dollar ended the North American trading session at C$1.2919 to the greenback, or 77.41 US cents, weaker than Thursday's close of C$1.2868, or 77.71 US cents.
The currency touched its weakest level since April 18 of C$1.2952. Overnight index swaps imply a 26 percent chance of a Bank of Canada interest rate cut this year, having swung from a 20 percent chance of a hike seen at the beginning of the week. That is in contrast to the United States, where New York Federal Reserve President William Dudley said that two US interest rate hikes this year are a reasonable expectation.
Speculators increased bullish bets on the loonie, Commodity Futures Trading Commission data showed. Net long Canadian dollar positions rose to 18,943 contracts in the week ended May 3 from 11,999 contracts in the prior week. Canadian government bond prices were mixed across the maturity curve, with the two-year price up 1.5 Canadian cents to yield 0.561 percent and the benchmark 10-year rising 4 Canadian cents to yield 1.353 percent. The Canada-US 10-year spread was 3.6 basis points more negative at -42.6 basis points, its largest gap since April 19, as Canadian government bonds outperformed.