Canadian Dollar Tumbles as Slowing U.S. Economy Dims Rate View

Canada’s dollar fell to a four-month low against its U.S. counterpart as unexpectedly weak economic data in the nation’s biggest trade partner prompted traders to pare bets the central bank will raise interest rates this year.

The currency, nicknamed the loonie for the image of the bird on the C$1 coin, weakened for a fourth day in the longest string of losses this year as bets Europe’s debt crisis will worsen amid Greece’s political turmoil damped demand for higher-yielding assets. It extended the decline after a gauge of U.S. leading indicators and a measure of manufacturing in the Philadelphia region unexpectedly fell.

“U.S. data today” is weighing on the loonie, said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “The Greece situation has people less willing to take risky positions, so you can’t count that out. I think the Bank of Canada will stay on hold this year.”

Canada’s currency depreciated 0.7 percent to C$1.0196 per U.S. dollar at 5 p.m. in Toronto. It was the weakest level since Jan. 16. One Canadian dollar purchases 98.08 U.S. cents.

The loonie dropped versus all of its 16 most-traded counterparts except the pound.

Implied volatility for one-month options on the Canadian dollar versus the greenback increased for a fourth day, rising to as much as 9.64 percent, the highest since Jan. 10. It fell to 6.59 percent on April 30, the lowest since June 2007. The five-year average is 12 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Bonds Rise

Canadian 10-year government bonds rose for a fifth day, the longest stretch in almost three months. Yields fell five basis points, or 0.05 percentage point, to 1.88 percent and touched 1.87 percent, the lowest level since December. Two-year note yields decreased six basis points to 1.21 percent.

The loonie weakened even after the government said Canadian wholesale sales rose 0.4 percent to C$48.7 billion in March, the second monthly increase, adding to evidence that Canada’s economic recovery is building. Payrolls had the biggest two-month job gain in three decades in March and April, Statistics Canada data showed last week.

Bank of Canada Governor Mark Carney said last month interest-rate boosts may be necessary to contain inflation that’s accelerating faster than central bank forecasts. The benchmark rate has been 1 percent since September 2010.

Interest-Rate Bets

Today’s weaker U.S. economic data cut odds the central bank will tighten in September to 43 percent, from about 55 percent yesterday, according to Bloomberg calculations on trading in overnight index swaps.

The Canadian currency gained 0.2 percent over the past week versus nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar climbed 2 percent as bets that Greece will leave the euro system spurred demand for safety, while the euro was little changed.

The loonie extended early losses versus the greenback after Philadelphia’s general economic index fell to minus 5.8 this month, the lowest reading since September, from 8.5 in the previous month. Economists in a Bloomberg News survey forecast the gauge would rise to 10. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.

The Conference Board’s leading-indicators gauge of the U.S. outlook for the next three to six months decreased 0.1 percent, the New York-based group said. A Bloomberg survey projected a 0.1 percent rise. Labor Department data showed more Americans that forecast filed applications for jobless benefits last week, a sign the labor market is making little progress.

U.S. Data Influence

“The developments with respect to Greece are just one influence on the market,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, referring to the U.S. currency’s gain versus the loonie. “The influence of U.S. data created some stop-loss buying on the dollar,” in which traders close positions on a losing bet, “taking dollar-Canada higher.”

The Canadian currency will probably depreciate further against its U.S. counterpart after weakening past a pivotal technical level, reversing a bullish trend, according to Royal Bank of Canada.

The loonie breached the seven-month resistance trend line at C$1.0097 per U.S. dollar yesterday, George Davis, chief technical analyst RBC Capital Markets in Toronto, wrote today in a client note. Resistance is an area on a chart where sell orders, in this case for the U.S. currency, may be clustered. The loonie may now slide to C$1.0159 and then to C$1.0319, matching its weakest level this year.

“A lot of the price action of the last week or so is a byproduct of the sovereign risks that have flared up in the euro zone,” Davis said in a telephone interview. “That’s created a broader risk-off tone.”

To contact the reporters on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net; Chris Fournier in Montreal at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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