Canadian dollar sinks as commodities drop on weak global manufacturing data

TORONTO – The Canadian dollar fell nearly a cent against the U.S. greenback on Thursday amid plunging commodity prices in the face of weak manufacturing reports from three of the world’s largest economies, and a strong warning on debt from the Bank of Canada.

The commodity-tied Canadian dollar shed 0.97 of a cent to 97.15 cents US as the greenback also gained ground against other currencies a day after the U.S. Federal Reserve extended an interest rate reduction program.

August gold prices dropped sharply, by $50.30 to US$1,565.50 an ounce, while July copper prices lost nine cents to US$3.30 a pound.

Oil prices dipped below $80 for the first time since October, with the crude contract losing $3.25, or 3.9 per cent, to close at $78.20 per barrel.

Prices fell to a level not seen since Oct. 5 amid data released Thursday that showed the United States isn’t creating as many jobs as hoped, Europe is facing another recession, and that manufacturing activity in China appears to have slowed.

The appetite among traders for riskier assets such as the commodity-tied loonie was also dented by the results of a monthly HSBC survey which showed manufacturing in China, the world’s No. 2 economy, has continued to contract. China’s growth has been a pillar of the global economy in recent years, so its slowdown has been of particular concern to investors.

In the 17-country eurozone, the equivalent manufacturing survey, called the purchasing managers’ index, fell to 44.8 points in June from 45.1 the previous month. A number below 50 indicates contraction. A related survey on the services sector also showed declining activity, suggesting a drop in GDP in the second quarter.

Meanwhile, in the U.S., the Philadelphia branch of the Federal Reserve reported that manufacturing slumped this month, pulled down by drops in new orders and shipments. Economists had expected no change in the manufacturing index.

“Poor PMI data continues to come out of Europe and China’s data was not up to expectations. I get the feeling the market is taking a page out of the British handbook — ‘Keep Calm and Carry On’ — but I don’t see how that will last,” said John Curran, senior vice-president at CanadianForex.

“(The Canadian dollar) will maintain its underperformance on the crosses if economic data releases continue to track towards the weaker side of expectations.”

Meanwhile, Bank of Canada governor Mark Carney warned that Canada’s relatively healthy economy has been largely based on borrowed money but the situation cannot go on indefinitely.

The central bank governor’s stern words to a business audience in Halifax came just hours after federal Finance Minister Jim Flaherty moved to clamp down on household lending by reducing the amortization period on mortgages to 25 years from 30, and by limiting home equity loans.

Carney made clear that he endorses the moves, calling them “prudent” and “timely” to support the long-term stability of the housing market and guard against financial excesses.

Economic news from Canada also included a report from Statistics Canada that retail sales dropped 0.5 per cent in April, much weaker than economists calls for a 0.2 per cent gain.

The federal agency also reported that number of people receiving regular EI benefits dropped for the third consecutive month in April, down 28,600 to 513,700.

In the U.S., the number of people seeking unemployment benefits dipped last week but not by enough to indicate hiring will pick up. Weekly applications for unemployment aid declined by 2,000 to a seasonally adjusted 387,000, the U.S. Labour Department said. That’s down from an upwardly revised 389,000.

And a measure of future U.S. economic activity rose in May, a sign the economy is likely to keep growing, though at a tepid pace. The Conference Board says that its index of leading economic indicators rose 0.3 per cent last month, after a 0.1 per cent drop in April. April’s drop was the first in seven months.