Canada Dollar Weakens to 8-Month Low as Sales, Inflation Fall

Canada’s dollar reached the weakest level in almost eight months versus its U.S. counterpart as retail sales dropped in December the most since 2010 and the inflation rate reached its lowest in more than three years.

The currency, called the loonie for the image of the bird on the C$1 coin, fell versus most major peers. It sank for a sixth day versus the U.S. dollar in the longest losing streak since August 2011 amid bets the Bank of Canada may lower interest rates before raising them. The loonie lost earlier this week as commodities slid amid ebbing risk appetite.

“It’s a hugely disappointing number at a sensitive time of year for retailers,” Adam Button, a Montreal-based currency analyst at Forexlive.com, said by phone from New York of the retail data. “The market was soft in the Canadian dollar coming into this, and this number is certainly going to keep the momentum going.”

The loonie depreciated 0.3 percent to C$1.0215 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0256, the weakest level since June 29, and lost 1.5 percent on the week. One Canadian dollar purchases 97.90 U.S. cents.

Futures traders decreased to the lowest level since August their bets that the Canadian dollar will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

Net Longs

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 19,379 on Feb. 19, compared with net longs of 26,565 a week earlier. They reached 68,668 Jan. 18, the most in 2013.

Canada’s currency pared losses as stronger German business confidence overshadowed a forecast by the European Commission that the euro area’s economy will shrink in 2013 for a second year. The Ifo institute in Munich said its business climate index climbed to 107.4 in February, a 10-month high. The Standard & Poor’s 500 (SPX) Index gained 0.9 percent in its first advance in three days.

Implied volatility for three-month options on the greenback versus the Canadian dollar reached 7.18 percent, the most since Oct. 1, before slipping to 6.97. Implied volatility signals the expected pace of currency swings and is quoted by traders to set option prices. The five-year average is 11.6 percent.

Bonds Gain

Canada’s government bonds rose, pushing yields on the benchmark 10-year debt down four basis points, or 0.04 percentage point, to 1.94 percent. The price of the 2.75 percent securities due in June 2022 increased 34 cents to C$106.82.

The loonie lost for a third week versus the greenback as retail sales slid 2.1 percent in December to C$38.6 billion ($37.9 billion), following a revised 0.3 percent gain in November, Statistics Canada data showed today. That brought the value of retailer receipts to the lowest since September 2011. The monthly decline was the biggest since April 2010. Economists surveyed by Bloomberg News forecast a 0.3 percent drop.

Canada’s consumer-price index rose 0.5 percent in January from a year earlier, the lowest gain since October 2009, Statistics Canada said today from Ottawa. Economists forecast a 0.6 percent rise. The gauge increased 0.8 percent in December.

“Inflation is low and diminishing,” said Button of Forexlive.com. “It’s growing more and more likely the Bank of Canada will shift to a neutral bias rather than a hawkish one.”

Rate Bets

Policy makers have held the benchmark interest rate at 1 percent since September 2010 to support the economy. Trading in overnight index swaps today showed investors priced in six basis points of easing by the central bank by its December meeting, data compiled by Bloomberg showed. A week ago, they had priced in nine basis points of tightening.

Central-bank Governor Mark Carney reiterated to lawmakers last week in Ottawa a rate boost is less urgent than previously anticipated because the weaker-than-expected economy is keeping inflation below the bank’s 2 percent target. Policy makers said in January an increase may still be needed over time.

Today’s reports followed data this month showing Canadian employment unexpectedly fell in January for the first time in six months and manufacturing sales dropped in December.

Canada’s gross domestic product rose 0.6 percent in the fourth quarter after a 0.6 percent increase from July through September, economists in a Bloomberg survey forecast before Statistics Canada reports the data March 1. The economy grew 5.8 percent in the third quarter of 2011.

‘Sharp Retreat’

“We’re at the point where the good economic stories that were evident earlier are fading,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said by phone from Toronto. “There’s a rather sharp retreat after the upswing in risk sentiment we’ve had for a while.”

The U.S. currency climbed against the Canadian dollar this week as stocks and commodities slid after minutes of the Federal Reserve’s last meeting showed several officials said the central bank should be ready to vary the pace of its monetary stimulus. The European Commission said today the 17-nation euro region’s economy will fall 0.3 percent this year, versus a November prediction of 0.1 percent growth.

Standard & Poor’s GSCI Index of 24 raw materials rose 0.1 percent today, paring its third weekly loss to 2.6 percent. Futures on crude oil, Canada’s biggest export, rose 0.5 percent, trimming its weekly gain to 3.3 percent on the week, to $93.26 a barrel in New York. Raw materials including oil account for about half of Canada’s export revenue.

Canada’s dollar may have weakened too much, too fast, and be ready to strengthen, a technical measure indicated. The currency’s 14-day relative-strength index against the U.S. dollar fell to 24, its third day below the 30 level some traders see as a sign an asset may be about to reverse direction.

The loonie has fallen 1.3 percent this year among the 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes. The U.S. dollar has gained 1.9 percent, and the euro has appreciated 2 percent.

To contact the reporter on this story: Taylor Tepper in New York at ttepper2@bloomberg.net

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

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