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Loonie Nears Weakest in Month After Revised Bank of Canada Expectations
Canada’s dollar touched the weakest level in a month as crude oil declined and traders repriced expectations for Bank of Canada interest-rate increases in light of economic data that suggests a slowing recovery.
Canada’s dollar, nicknamed the loonie, capped its second weekly loss on Aug. 20. The currency earlier last week appreciated on speculation a potential takeover of Potash Corp. of Saskatchewan Inc. may spark more demand for Canadian commodity producers.
“The Canadian dollar’s downside has been exposed by U.S. economic weakness and a slowing in previously supportive Canadian indicators like employment and inflation,” Sacha Tihanyi, a currency strategist in Toronto at Bank of Nova Scotia, Canada’s third-largest bank, wrote in an e-mail. “It looks like we’ve broken resistance at C$1.05 finally,” he wrote, referring to the upper boundary of a trading range, in this case for the U.S. dollar versus the loonie.
The Canadian currency touched C$1.0530, the strongest since July 20, before closing at C$1.0522 per U.S. dollar in Toronto, compared with C$1.0475 on Aug. 20. One Canadian dollar buys 95.04 U.S. cents.
For the first time since the Bank of Canada raised interest rates on July 20, bond traders bet that Governor Mark Carney will leave borrowing costs unchanged when he and his fellow policy makers meet in two weeks.
Swap Tales
Probabilities derived from overnight index swaps show a 62 percent chance the central bank will keep its main rate at 0.75 percent on Sept. 8, up from less than 40 percent earlier this month, according to Bank of Nova Scotia data. Bank of Montreal calculations put the likelihood of a pause at more than 60 percent from about 45 percent a week ago.
“The September hike was largely accepted as being a sure bet until very recently,” Mohammed Ahmed, a rates strategist at Canadian Imperial Bank of Commerce in Toronto, wrote in an e- mail. “Now the market is much less certain. The current levels are the most dovish we have seen since” rates were increased from 0.5 percent five weeks ago, he said.
Expectations in the bond market for a boost reversed after reports from Canada and the U.S. showed the economic recovery may be faltering and inflation is slowing. Statistics Canada said Aug. 20 that consumer prices rose 1.8 percent in July from a year earlier, less than 1.9 percent median estimate of 19 economists surveyed by Bloomberg, while the “core” inflation rate decelerated to 1.6 percent.
Bond Trade
Canada’s government bonds rose, with the 2-year note’s yield down 6 basis points, or 0.06 percentage point, to 1.24 percent. The price of the 2 percent security maturing in September 2012 climbed 11 cents to C$101.5.
The nation’s federal bonds have made investors 6.23 percent this year, according to a Merrill Lynch & Co. index.
Canada’s dollar rose to as high as C$1.0271 per U.S. dollar on Aug. 17, on speculation a $39 billion hostile bid for Potash Corp. by BHP Billiton Ltd. would spark more demand for Canada’s commodity producers.
Potash Corp., based in Saskatoon, Saskatchewan said it began talks with other companies on alternatives to the offer after rejecting Melbourne-based BHP’s bid last week.
“Discussions are being pursued with several of these third parties in order to generate value-enhancing alternatives,” Potash Corp. said today in a statement. China’s Sinochem Group and Brazil’s Vale SA made initial inquiries with Potash Corp.’s board late last week about the possibility of holding talks, a person with knowledge of the matter said, declining to be identified because the information isn’t public.
Retail sales rose 0.4 percent in June, after dropping 0.2 percent in May, according to the median of 16 economists’ forecasts compiled by Bloomberg News. Statistics Canada will release the data tomorrow at 8:30 a.m. in Ottawa.
The MSCI World Index, a gauge of equities in 24 developed nations was little changed. Crude oil, Canada’s largest export, fell 0.7 percent to $72.93 a barrel.
To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
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