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Canadian dollar plunges as US growth engine accelerates

H.S. Borji
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The Canadian dollar fell to a fresh six-month low against the greenback on Friday, as US employers added workers at a faster pace in September and the unemployment rate fell to a six-year low.

The loonie, as the Canadian dollar is known, declined 0.71 percent to 0.8897 US. The loonie was trading near the intraday low, as the markets weighed the latest batches of US data. The Canadian dollar is pacing for a weekly decline of 0.7 percent, after having depreciated in value by 5.1 percent over the last three months.

The markets reacted sharply to the Labor Department’s employment report, which was released at 8:30 am EST. The US economy added 248,000 nonfarm payrolls in September, blowing past estimates calling for 215,000. August’s figure was revised upward to reflect growth of 180,000, following a disappointing advance estimate showing only 142,000.

The unemployment rate declined 0.2 percentage points to 5.9 percent, a new six-year low, and is now approaching the critical 5.5 percent level that many economists consider healthy.

Declining unemployment and a faster rate of job creation took the spotlight away from earnings growth, which stagnated in September. Average hourly earnings were unchanged, despite estimates calling for an increase of 0.2 percent. Year-on-year, earnings had grown only 2 percent.

A tighter labour market is all the justification the US dollar bulls needed to drive up the world’s most actively traded currency. As the unemployment rate continues to drop, investors are growing more comfortable with the prospect of higher interest rates. Although the Federal Reserve has not yet committed to any specific timeline for a rate adjustment, the currency markets are pricing in a rate-hike for the first half of 2015.

Canadian data failed to grab headlines on Friday. The country’s lone release – international merchandise trade – showed the country opened up a trade deficit in August amid weaker automotive and crude exports.

Canadian exports decreased 2.5 percent to $44.19 billion, as imports edged up 3.9 percent to $44.8 billion. As a result, the country posted a trade deficit of $610 million. Canada had posted a trade surplus of $2.2 billion in July after exports reached a record high.

Exports to the United States – Canada’s largest trade partner – declined 2.5 percent to $33.3 billion. Exports to other countries declined $10.9 billion, official data showed.

Exports played a leading role in generating economic growth in the second quarter. Exports of goods and services advanced 4.2 percent, after posting a 0.2 percent decline in the previous quarter. That helped the Canadian economy post its strongest quarter of growth since 2011. Canada’s gross domestic product increased 0.8 percent in the April to June period. This translated into an annualized growth rate of 3.1 percent.

The Bank of Canada is relying on exports to drive the country’s recovery. A weaker local currency and stronger demand from the United States will serve as catalysts for Canadian exports in the months ahead. According to several analysts, the Canadian dollar is expected to depreciate further, eventually reaching 80 US cents.

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