Canada Dollar Falls for First Time in 4 Days as Inflation Slows

Canada’s dollar weakened against its U.S counterpart for the first time in four days as inflation unexpectedly slowed in July, adding to evidence the nation’s economy is moving away from full capacity.

The currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, pared a sixth weekly gain, its longest winning streak since 2010. The loonie rose yesterday against most major peers amid bets the economic recovery in the U.S., the nation’s largest trade partner, was building momentum.

“We got a bit of a knee-jerk reaction to the data that came in weaker than expected,” Matthew Perrier, Toronto-based director of foreign exchange at Bank of Montreal, said in a telephone interview. “The backdrop still seems supportive for the Canadian dollar.”

Canada’s currency depreciated 0.3 percent to 98.93 cents per U.S. dollar at 5 p.m. in Toronto. It gained 0.2 percent this week. The last time it rose for more than five straight weeks was a stretch that ended in October 2010. One Canadian dollar buys $1.0108.

Implied volatility for one-month options on the U.S. dollar versus the Canadian currency touched the lowest level since May 2007, 6.15 percent. 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.

Government bonds rose, pushing the yield on two-year debt down four basis points, or 0.04 percentage point, to 1.20 percent. It touched 1.26 percent yesterday, the highest since May 18. The price of the 2.25 percent securities maturing in August 2014 increased 7 cents to C$102.01. Ten-year yields fell two basis points to 1.95 percent.

U.S. Reports

The Canadian currency’s decline was tempered by better- than-forecast readings in U.S. consumer confidence and leading economic indicators.

The Conference Board’s gauge of the outlook for the next three to six months increased 0.4 percent after a revised 0.4 percent drop in June, the New York-based group said today. The Thomson Reuters/University of Michigan preliminary August index of consumer sentiment increased to 73.6, the highest level since May, from 72.3 the prior month.

The loonie has gained this week versus 13 of its 16 most- traded counterparts as increases in U.S. retail sales, industrial output and building permits spurred speculation North American economic growth will sustain Canada’s exports. Raw materials, led by crude oil, account for about half of the nation’s export revenue.

‘Modestly’ Bullish

“If this risk-on environment continues through next week, there’s a decent chance that the Canadian dollar tests the 98- cent level, which is its high on the year,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal, said in a telephone interview.

Jespersen said he’s “modestly” bullish on the Canadian dollar in the short term.

The currency rallied 3.5 percent over the past six months versus nine developed-nation peers monitored by Bloomberg Correlation-Weighted Indexes, the best performance. The U.S. currency strengthened 2.6 percent, while Australia’s dollar slipped 0.5 percent and the euro tumbled 4.5 percent.

The consumer price index advanced 1.3 percent in July from a year ago, versus a 1.5 percent gain the prior month, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, increased 1.7 percent after a June gain of 2 percent. Economists surveyed by Bloomberg forecast that the total rate would be 1.5 percent and core would be 2 percent.

Manufacturing Falls

The data followed a Statistics Canada report yesterday that showed the nation’s manufacturing sales unexpectedly fell 0.4 percent in June.

“I wouldn’t be surprised to see people tactically reduce some of their Canadian holdings,” Darcy Browne, managing director of capital-markets trading at Canadian Imperial Bank of Commerce in Toronto, said in a telephone interview. “There hasn’t been a lot of joy in Canada if you look at the fundamentals. How far can it run on safe-haven status?”

Bank of Canada Governor Mark Carney said last month inflation will “remain noticeably below the 2 percent target over the coming year” in part because of lower gasoline prices. Carney also said it “may become appropriate” to raise his key 1 percent interest rate for the first time since September 2010 as the economy moves toward full output.

The likelihood the Bank of Canada will raise the benchmark interest rate at its January meeting decreased to 23.1 percent today, from 38.6 percent yesterday, according to Bloomberg calculations on overnight index swaps.

Policy makers’ next meeting is Sept. 5. They have held the rate at 1 percent since September 2010 to support the economy.

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net

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

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