Canadian Dollar Falls 2nd Day on Signs Economic Growth Slowing

Canada’s dollar weakened a second day against its U.S. peer after Canadian factory sales fell in January, an unexpected drop that underscores the two nations’ diverging economic prospects.

The Canadian currency declined as new U.S. home construction rose and building permits climbed to the highest level in almost five years. The so-called loonie dropped against the majority of its 16 most-traded counterparts as Cyprus’s parliament voted to reject a levy on bank deposits demanded by euro-zone officials in exchange for a bailout, threatening to worsen Europe’s debt crisis. The U.S. Federal Reserve began a two-day policy meeting in Washington.

“The Canadian economy has gone through its recovery and is now at the point where it had sort of run out of steam, and the U.S. economy had gone through its adjustment and is starting to emerge,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc. “The markets are paying more attention to that now.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.5 percent to C$1.0268 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 97.39 U.S. cents.

Watt says the Canadian dollar could weaken past C$1.0363, last reached June 28.

Factory Sales

Canada’s benchmark 10-year government bonds rose, with yields falling four basis points, or 0.04 percentage point, to 1.82 percent. The 2.75 percent security maturing in June 2022 added 37 cents to C$107.87.

The Bank of Canada will auction C$3.3 billion ($3.2 billion) of 1 percent notes maturing in May 2015 tomorrow.

Canadian factory sales dropped last month for the fourth time in five months, led by declines in automobile and aircraft. Sales fell 0.2 percent to C$48 billion ($46.9 billion), Statistics Canada said in Ottawa. None of the 20 economists surveyed by Bloomberg forecast a decline, and their median estimate was for a 0.6 percent gain.

Wholesale sales increased 0.3 percent, less than the 0.4 percent increase forecast in a Bloomberg survey of 18 economists.

‘Negative Number’

“A little bit of a negative number for Canada, and again we are trying to build on that good employment number by having some other positive economic data come out,” Don Mikolich, executive director of foreign exchange sales at Canadian Imperial Bank of Commerce, said by phone from Toronto, referring to February job gains. “Without that positive reinforcement over this week and next week, I think Canada will test the upper ends of the boundaries.”

Mikolich said the Canadian dollar could weaken to C$1.03 per U.S. dollar in the next two weeks.

The Canadian dollar rose 0.9 percent last week for its first five-day advance versus the greenback since early February after employment gains in both Canada and the U.S. exceeded forecasts, with unemployment rates at four-year lows.

New U.S. home construction rose to 917,000 in February from 910,000 the month before and building permits climbed 4.6 percent to 946,000 the highest level in almost five years, , the Commerce Department reported, adding to signs the housing market is helping boost the U.S. economy.

‘Dovish Tone’

The U.S. housing market has been boosted by record monetary stimulus from the Fed, keeping mortgage rates low, a policy the central bank is expected to continue when it ends its meeting tomorrow.

Fed officials have said they will keep their benchmark lending rate near zero as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. They also said during a January meeting they would keep buying $40 billion per month in mortgage bonds and $45 billion in Treasuries.

“The real key will be, how dovish does Bernanke sound, and does he tone down his dovish tone at all?” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS) by phone from Toronto. “If he doesn’t, I suspect it will be a stronger Canadian dollar. And, if he does tone back his dovish tone, then it’s a stronger U.S. dollar.”

Traders were the least bearish on the loonie in five weeks yesterday as the three-month 25-delta risk reversal rate fell to 1 percent, the least since Feb. 8. It was at 1.05 percent today.

The loonie has lost 0.5 percent this year against nine other developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar has gained 3.4 percent and the Japanese yen has fallen 6.7 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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