TORONTO (Reuters) - The Canadian dollar tumbled more than a penny to a one-week low against the U.S. currency on Friday, while government bonds climbed as weak Canadian and U.S. job reports for July suggested a softening economic recovery.
The currency fell after a Canadian employment report showed the economy posted its first monthly job losses of the year, then extended its decline after data showed U.S. employment fell for a second straight month.
The weak employment data helped knock the Canadian currency as low as C$1.0307 to the U.S. dollar, or 97.02 U.S. cents, its lowest level in a week.
The currency remained near its low as U.S. equities stayed soft. It closed at C$1.0279 to the U.S. dollar, or 97.29 U.S. cents, a sharp reversal from Thursday's finish at C$1.0166 to the U.S. dollar, or 98.37 U.S. cents. It hit a 13-week high against the greenback on Thursday.
"It's coming a bit back down to earth," said David Tulk, senior macro strategist at TD Securities. "It's tricky to figure out why exactly the Canadian dollar is being hurt as badly as it was, other than just returning some of the strength earlier in the week."
He said the domestic employment data had some decent details compared with the U.S. report.
Statistics Canada said the economy lost 9,300 jobs in July, after robust job creation in the first half of the year had recovered nearly all the jobs loss during the recession. The unemployment rate unexpectedly rose to 8 percent from 7.9 percent. Analysts in a Reuters poll had predicted an increase of 15,000 jobs after a strong gain of 93,200 in June.
By contrast, U.S. non-farm payrolls fell 131,000, against expectations for a 65,000 decline, while the unemployment rate was unchanged at 9.5 percent in July.
The increased uncertainty about the U.S. economic recovery, highlighted by the recent rough patch of U.S. data, has spilled over to the outlook for the Canadian dollar.
"What helped the Canadian dollar earlier this year is now weighing on the Canadian dollar. We're underperforming our commodity and cyclically sensitive peers," said David Watt, senior fixed income and currency strategist at RBC Capital Markets.
Canadian bond prices were firmer across the curve after the domestic jobs data, which added to recent evidence that the country's recovery is starting to slow.
Softer U.S. equities also contributed to investors favoring the safety of government bonds.
Analysts said the Canadian job figures should keep the Bank of Canada on track for a quarter-point interest rate rise on September 8, to follow two hikes of the same size in the past two months.
But market pricing, as measured by yields on overnight index swaps, fell to around 59 percent chance of a rate increase, compared with about 68 percent before the jobs report.
"I think the Bank of Canada will realize that the three-, six-month moving average is still quite healthy. It's not one single report that will put doubt in Governor (Mark) Carney's mind," said Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities.
"It's still easy for the bank to hike on September 8 given the level of the overnight rate is so low."
The U.S. jobs data will likely keep debate alive on whether more easing is needed there. The next U.S. Federal Reserve policy-setting meeting is on Tuesday.
The two-year bond was up 15 Canadian cents to yield 1.442 percent, while the 10-year bond gained 43 Canadian cents to yield 3.074 percent.