The Canadian dollar dropped to the lowest point in two weeks versus its U.S. peer as traders speculated a rally that saw the currency strengthen to within a cent of parity moved too far, too fast.
The currency fell for the fourth day versus its U.S. peer, its longest streak since February, as crude oil, Canada’s largest export, also declined for a fourth day. With economic growth forecast at 2 percent this year, the U.S. is set to outpace Canada’s 1.6 percent growth rate, according to the median estimates of Bloomberg surveys. The Canadian dollar’s rally in the last two months brought it to C$1.0014 per U.S. dollar on May 9, its closest to parity since Feb. 15.
“The market may have been overpriced and moved too far, so we’re seeing a bit of a retraction,” said Greg T. Moore, currency strategist at Toronto-Dominion Bank, by phone from Toronto. “If we don’t have that summer swoon or soft patch in U.S. growth, then we should have higher yields in the U.S., and that’s what we’ve seen.”
The loonie, as the Canadian dollar is known for the image of the C$1 coin, fell 0.7 percent to C$1.0180 per U.S. dollar at 5 p.m. in Toronto, the lowest level since April 26. One loonie is worth 98.23 U.S. cents.
The currency touched C$1.0182, its 50-day moving average, which some traders use to measure of momentum.
U.S. dollar-Canada dollar was the second-most actively traded pair in the over-the-counter foreign-exchange options market today, totaling $6.7 billion, or 16 percent, of the $43 billion overall. Dollar-loonie options trading was 683 percent more than the average of the past five Tuesdays at a similar time in the day. U.S. dollar-yen was the most-traded at $11.9 billion.
Canada’s benchmark 10-year government bonds fell, with yields rising five basis points, or 0.05 percentage point, to 1.96 percent. The 1.5 percent security maturing in June 2023 dropped 44 cents to C$95.87. Yields on 10-year U.S. Treasuries were higher than their Canadian counterpart for the fourth day, the first time the U.S. has had a yield advantage since March 27.
Futures on crude oil fell 1.1 percent to C$94.17. The Standard & Poor’s 500 Index of U.S. stocks rose 1 percent, setting a record for the eighth time in nine days.
The cost to insure against declines in the Canadian dollar versus its U.S. counterpart was at its highest point in more than eight months. The three-month so-called 25-delta risk reversal rate was 1.5 percent, the highest since Sept. 5. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.
“We did move a little too far,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, by phone from London. “It’s the classic case that the U.S. is moving, or continues to move, somewhat ahead of the Canadian cycle. So the U.S. looking to move back to a stronger growth phase in the latter half of the year.”
Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart was 6.85 percent, the highest level since March 11. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.
JPMorgan Chase & Co. cut its outlook for second quarter growth in China, the world’s second biggest economy, citing weak domestic demand yesterday. That spurred losses in the dollars of Canada’s fellow commodity exporters Australia and New Zealand, for both of which China is the biggest trading partner.
The Aussie fell 0.6 percent to 98.89 U.S. cents, while the so-called kiwi lost 0.6 percent to 81.97 U.S. cents.
“Its just a little U.S. dollar strength in the market, and particularly some fears in the market brewing over the outlook for China,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS) by phone from Toronto. “On the back of that, I think there was some pressure on Aussie and maybe CAD.”
The loonie has gained 2.9 percent in the past month, the most among 10 developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar added 2 percent and the Australian dollar lost 2.6 percent.
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