In response to an unexpected weakening in Canadian employment, the Canadian Dollar Weakens.

The Canadian dollar weakened the most in seven weeks after employment unexpectedly declined for the second time in three months in April, boosting bets the Bank of Canada may lower interest rates to support economic growth.

The currency dropped from almost the strongest level against the U.S. dollar in four months as employment fell by 28,900 in April and the participation rate declined to the lowest in more than 12 years, Statistics Canada said in Ottawa. The Canadian currency sank to a 4 1/2 year low of C$1.1279 on March 20, two days after Bank of Canada Governor Stephen Poloz said he couldn’t rule out interest-rate cuts.

Today’s job report “will add to ammunition that Poloz has in his back pocket to remind people that the economy isn’t running at full steam and the desire for a weaker currency to help the export sector,” Ken Wills, a senior corporate dealer at CanadianForex, said by phone from Toronto. “This number was definitely a big miss. It will weigh on the currency.”

Canada’s currency plunged after employment dropped last month following a 42,900 gain in March, and compared with a 13,500 job increase forecast by economists surveyed by Bloomberg News. Accommodation and food service jobs led the decline by industry, falling by 32,200.

The unemployment rate remained at 6.9 percent, as predicted in a Bloomberg survey, while 25,600 people left the labor force to push the participation rate to 66.1 percent, the lowest since November 2001.

“Exports are still sluggish and not enough to support growth,” said Charles St-Arnaud, London-based senior economist at Nomura Securities International Inc., who expects a 10-year yield of 2.95 percent in the fourth quarter. “The sensitivity of U.S. exports to Canadian growth has also decreased, so there is a case there to be cautious.”

The loonie has tumbled 4 percent this year against a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, the worst performance in the group.

Low Interest Rates in Canada for Years to Come

Like Fed counterparts in the US, Bank of Canada’s Stephen Poloz says Interest Rates to Remain Low for Years to Come.

Canadians can expect to enjoy relatively cheap borrowing costs for some time to come — perhaps years — even after the economy returns to full capacity and the Bank of Canada starts hiking interest rates, bank governor Stephen Poloz said Thursday [April 24, 2014].

The central banker told a luncheon in Saskatoon that the economy has room to grow before it can be considered to be firing on all cylinders, but even when it does — likely sometime in early 2016 — Canadians shouldn’t expect a sudden increase in interest rates to fight inflation.

Room to Cut

With today’s Canadian jobs report you can forget all about rate hikes. Instead start thinking about rate cuts to “boost exports”.

Canada did get in three rate hikes, so there is “room” so to speak for three cuts.

The Fed, the ECB, and Bank of Japan already have rock bottom rates. Canada was there for a while and may get there again.

How can every country cut rates to boost exports? Mathematically it’s impossible, but it certainly doesn’t stop central banks from trying, and at a huge expense to savers and everyone on fixed income.

Mike “Mish” Shedlock