Canadian Dollar Weakens Most in Six Month on China Data

The Canadian dollar fell the most in a month against its U.S. counterpart as selling pressure emerged after signs of economic growth from the U.S. and China failed to drive the currency above a key technical level.

The loonie, as Canada’s dollar is nicknamed, posted its second straight weekly decline against the euro on speculation the European Central Bank will allow the 17-nation currency to appreciate. The Canadian dollar rallied earlier in the week against the U.S. currency before falling the most in six months yesterday after it failed to breach levels that have held since October even as China’s economic growth exceeded forecasts. The Bank of Canada is forecast to keep its benchmark interest rate target unchanged when policy makers meet Jan. 23.

“This has been shaping up over the week,” said Steve Butler, managing director of global banking and markets at Bank of Nova Scotia, by phone from Toronto. “The move just lost momentum and with the foreign-exchange market, it’s quite important, and we just saw that shake out overnight.”

The loonie fell 0.7 percent to 99.17 cents per U.S. dollar this week in Toronto, the largest decline since the five days ended Dec. 21. One loonie buys $1.0084.

Price Swings

Implied volatility for three-month options on the U.S. dollar versus the loonie touched 5.95 percent yesterday, the most since Dec. 27. Implied volatility signals the expected pace of currency swings and is quoted and used by traders to set option prices.

Futures traders increased their bets that the Canadian dollar will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the Canadian dollar compared with those on a drop -- so-called net longs -- was 68,668 on Jan. 15, compared with net longs of 64,005 a week earlier.

Options traders became more bearish on the Canadian dollar. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against the loonie versus contracts to sell, traded at 0.89 percentage point yesterday, up from 0.82 percentage point the day before. It averaged 1.5 percentage points this year.

Economic Data

China’s economic growth exceeded forecasts, posting 7.9 percent growth in the fourth quarter from a year earlier, compared with 7.8 percent forecast in a Bloomberg survey of economists.

Government reports on housing starts and unemployment claims released Jan. 17 showing economic strength in the U.S., Canada’s biggest trading partner, failed to push the loonie through 98.26 cents per U.S. dollar that has become a key level of resistance since October, George Davis, chief technical analyst for fixed income and currency strategy at Royal Bank of Canada, wrote in a note to clients.

“If you flirt with an important technical level and you keep failing to break it, what tends to happen is you need that correction, you need it to pull back before it gathers momentum for another charge at it,” said David Doyle, a strategist at Macquarie Capital Markets, by phone from Toronto.

Bond Trade

The country’s benchmark 10-year bonds rose, with yields falling two basis points, or 0.02 percentage point, to 1.92 percent. The 2.75 percent security due in June 2022 added 18 cents to C$107.10.

The Bank of Canada will announce additional details about a Jan. 30 10-year note sale on Jan. 24

The loonie fell against the euro on speculation the ECB would allow the currency to appreciate after ECB policy maker Ewald Nowotny said the euro exchange rate “is not a major concern” on Jan. 16. The euro rose after Spain’s borrowing costs declined in a bond auction January 17, easing concerns the country will default on its loans and be forced out of the single currency.

The euro gained 0.5 percent against the Canadian dollar this week to C$1.3210 per euro, and the yen fell 0.4 percent in the week to 90.85 yen per loonie.

The Bank of Canada has kept its policy interest rate at 1 percent since September 2010, the longest pause since the 1950s, and has said since April that borrowing costs may rise.

Trading in overnight index swaps show a 98.2 percent chance of the Bank of Canada won’t raise interest rates at its Jan. 23 meeting, according to data compiled by Bloomberg. The chance of an increase reaches 25 percent by the May 29 meeting, the data show.

The loonie has fallen 1.6 percent during the past six months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The euro has gained 5.5 percent while the greenback has dropped 3.6 percent.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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

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