Canada Dollar Falls to 1-Year Low as Bernanke Hints at Tapering

Canada’s dollar dropped to an almost one-year low versus its U.S. peer after Federal Reserve Chairman Ben S. Bernanke said monthly bond purchases may be reduced if the economy shows sustained growth.

The currency declined earlier after Canadian retail sales stagnated in March, boosting bets the Bank of Canada will reverse its bias to raise interest rates. It remained lower as the minutes of the Fed’s last meeting showed a number of officials were willing to taper bond buying as early as the next meeting on evidence of sustained growth. The so-called loonie fell against the majority of its 16 most-traded peers as oil, the nation’s largest export, dropped for a second day.

“You’re seeing a bit of a selloff after Bernanke made that clarifying comment that, if things do look a little bit better, there’s the potential for tapering,” Emanuella Enenajor, an economist at CIBC World Markets, said by phone from Toronto. “It hit commodities, it hit risk-correlated currencies, as well. So you saw the Aussie take a hit, you saw the U.S. dollar see a little support and, of course, you saw the Canadian dollar lose a little support.”

The loonie, as the Canadian dollar is nicknamed, fell 1 percent to C$1.0367 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0388, the weakest level since June 5, 2012. One loonie buys 96.46 U.S. cents.

Crude-oil futures tumbled 2.2 percent to $94.06 a barrel in New York. The Standard & Poor’s 500 Index of U.S. stocks erased earlier gains to drop 0.8 percent.

Bond Auction

Canada’s 10-year government bonds declined, with yields adding six basis points, or 0.06 percentage point, to 1.97 percent. The 1.5 percent security maturing in June 2023 lost 50 cents to C$95.80.

The Bank of Canada sold C$1.4 billion of securities maturing in December 2045 with an average yield of 2.546 percent. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.47 versus 2.36 at the previous auction of the securities on March 13. The current 30-year security yielded 2.56 percent.

The cost to insure against declines in the Canadian dollar versus its U.S. counterpart fell from its highest point in more than eight months. The three-month 25-delta risk reversal rate fell to 1.6 percent, after touching 1.7 percent May 17, the highest since Aug. 31.

Canadian retail sales were little changed at C$39.5 billion ($38.4 billion), Statistics Canada said in Ottawa, following a revised 0.7 percent increase the prior month. Economists surveyed by Bloomberg News forecast a 0.1 percent gain, based on the median of 24 projections.

‘Hawkish Bias’

The report “raises questions about the bias of the Bank of Canada, the hawkish bias -- is this something that can or will be changed in the next few months?” Jane Foley, senior currency strategist at Rabobank International, said by phone from London. “There is a minority opinion out there that suggests it should be changed, and I’d suggest that if we do keep on getting weaker numbers, that call will get stronger.”

The retail-sales report is among the last economic readings before Stephen Poloz takes over as Bank of Canada governor on June 3, after predecessor Mark Carney leaves to run the Bank of England. Carney’s warning that he may raise rates, repeated at every meeting for the past year, has helped push up the Canadian dollar and undermine exporters at a time when growth is flagging.

The Bank of Canada has held its overnight rate at 1 percent since September 2010, where it is forecast to remain through the rest of the year by 22 economists surveyed by Bloomberg.

Bernanke ‘Wrench’

The loonie briefly erased a decline against its U.S. peer after Bernanke said a premature end to monetary stimulus would endanger the U.S. economic recovery. The currency then retraced the move as the Fed chief testified that, as the outlook for the labor market “improves in a real and sustainable way, the committee will reduce the flow of purchases.”

Bernanke threw a “monkey wrench into the mix,” Adrian Miller, director of fixed-income strategy at GMP Securities LLC, said by phone from New York. “By the market’s interpretation of his comments saying cuts are going to come sooner rather than later, the dollar then rises because its less debasing, and then that smacks the commodities market, and everything that’s attached to the commodities market. And the loonie is attached to the commodities market.”

The minutes showed that many Fed officials said more progress in the labor market is needed before deciding to slow the pace of asset purchases.

The loonie has gained 0.5 percent in the past month against nine other developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The Australian dollar has fallen 4.4 percent while the U.S. dollar has gained 1.7 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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