Canada Dollar Drops on Speculation Fed May Taper Asset Buying

The Canadian dollar declined a second day versus its U.S. peer on speculation the Federal Open Market Committee may start tapering monthly bond purchases that have a tendency to debase the American currency.

Canada’s currency rose earlier after government figures showed foreign investors bought the most Canadian securities in seven months in April and existing home sales rose at their fastest pace in more than two years in May. Stephen Poloz makes his first speech as Bank of Canada governor on June 19 in Oakville, Ontario. Federal Reserve Chairman Ben S. Bernanke said in May the central bank could reduce purchases if there’s sustainable improvement in employment.

“The market is pre-positioning for the FOMC meeting,” David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities in Toronto, said in a telephone interview. “Expectation that Bernanke might consider laying the groundwork for tapering the asset-purchase program is perhaps giving the U.S. dollar a little bit of a lift, which comes at the expense of the Canadian dollar.”

The loonie, as the Canadian dollar is nicknamed for the image of the aquatic bird on the C$1 coin, dropped 0.2 percent to C$1.0186 per U.S. dollar at 5 p.m. in Toronto after touching C$1.0150. The currency reached C$1.0137 on June 14, the strongest since May 14. One loonie buys 98.17 U.S. cents.

Oil, Bonds

Futures on crude oil, Canada’s largest export, traded at $97.90 a barrel in New York after gaining as much as 0.9 percent and falling 0.5 percent. The S&P GSCI Index (SPGSCI) of 24 commodities fell 0.1 percent. The S&P 500 Index (SPX) of stocks rose 0.8 percent after gaining as much as 1.2 percent.

Canada’s benchmark 10-year government bonds fell, with yields gaining three points, or 0.03 percentage point, to 2.15 percent. The 1.5 percent security maturing in June 2023 dropped 26 cents to C$94.22.

The loonie gained earlier as purchases by foreigners totaled C$14.9 billion ($14.7 billion) in April, Statistics Canada said in Ottawa. Foreign investors bought C$12.8 billion of debt, including C$6.50 billion of corporate bonds and C$3.20 billion of money-market paper sold by provincial and local governments. Non-residents also bought C$2.15 billion of Canadian stocks, according to the report. Economists in a Bloomberg survey forecast a gain of C$3 billion.

Home sales increased 3.6 percent in May from the previous month, the Canadian Real Estate Association said in a statement today, the biggest gain since January 2011. Average home prices rose 0.1 percent in May to C$374,473 ($368,470) and are up 3.7 percent from a year earlier, the realtor group said.

Poloz Bias

Hedge funds and other large speculators last week decreased their bets the Canadian dollar will decline against the greenback, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 35,907 on June 11, compared with net shorts of 39,776 a week earlier.

The loonie extended losses after the Financial Times reported that Bernanke will probably signal a reduction in monthly purchases, only to pare the drop after the newspaper’s reporter posted on Twitter that he didn’t have confirmation from Fed officials and urged investors to “chill out.”

The Fed starts a two-day policy meeting tomorrow as investors weigh whether the U.S. central bank will taper its buying of $85 billion of government and mortgage securities a month to spur the economy. The central bank has kept its target for overnight lending between banks at almost zero since December 2008.

‘Overriding Influence’

“The Fed decision this week and the guidance we’ll get from Bernanke on Wednesday will be the overriding influence on a directional bias,” Jack Spitz, managing director of foreign exchange at National Bank of Canada (NA), said by phone from Toronto. “With the constructive data that we’ve seen, particularly on the labor front in Canada, I suspect Poloz will remain passively hawkish on the bias.”

The loonie gained on June 6 after Poloz, the former chief executive officer of the nation’s trade financing agency, reiterated to lawmakers his predecessor Mark Carney’s bias to raise the benchmark interest rate as the economy strengthens. The bank makes its next rate decision on July 17

Carney, who left to head the Bank of England on June 1, kept the key interest rate at 1 percent for the 22nd consecutive meeting on May 29. Poloz will probably maintain Carney’s no-change policy for at least the rest of the year, according to economists surveyed by Bloomberg News.

“Mr. Poloz will probably eschew any early action from the rates side,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, said by phone from London.

Canada’s currency has fallen 1 percent in the past week, the worst performance among 10 developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The greenback dropped 0.9 percent while the yen led all gainers, adding 3.5 percent.

To contact the reporters on this story: Jeff Marshall in New York at jmarshall75@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net

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

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