The Canadian dollar posted its biggest loss in more than two months versus its U.S. peer after Federal Reserve Chairman Ben S. Bernanke said monetary stimulus that involves printing the U.S. currency could slow this year.
Canada’s dollar rose against that of commodity-exporting counterpart New Zealand before a report tomorrow forecast to show inflation (CACPIYOY) picked in May. The greenback gained against the majority of its 16 most-traded peers after Bernanke said yesterday the central bank will probably taper its $85 billion in monthly bond buying later in 2013 and halt purchases around mid-2014 as long as the economy performs in line with Fed projections.
“There’s just less supply of dollars out there and so less supply should lead to a higher price for the U.S. dollar,” David Doyle, a strategist at Macquarie Capital Markets, said by phone from Toronto. “When you have U.S. dollar strength, the Canadian dollar starts to decline.”
The loonie, as the Canadian dollar is nicknamed for the image if the aquatic bird on the C$1 coin, fell 1.1 percent to C$1.0387 per U.S. dollar at 5 p.m. in Toronto, the biggest drop on a closing basis since April 15. One loonie buys 96.27 U.S. cents.
Canada’s benchmark 10-year government bonds fell, with yields rising seven basis points, or 0.07 percentage point, to 2.32 percent after touching 2.36 percent, the highest since October 2011. The 1.5 percent security maturing in June 2023 lost 62 cents to C$92.73.
Futures on crude oil, Canada’s largest export, tumbled 2.9 percent to $95.40 per barrel in New York, while the Standard & Poor’s 500 Index of U.S. stocks fell 2.5 percent.
The cost to insure against declines in the Canadian dollar versus its U.S. peer reached the highest in more than year. The three-month so-called 25-delta risk reversal rate rose as high as 1.8000, its highest level since July 2012.
Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.
“We’d be looking for current-account deficits to underperform -- and Canada has a current-account deficit,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “They’re reliant on foreign inflows of capital to fund those deficits. And as global liquidity, even at the margin, becomes less abundant, you have to find it a little harder to attract that capital.”
Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart touched 8.3 percent, the highest point since July 2012. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.
Inflation in Canada picked up to an annualized 0.9 percent in May from 0.4 percent the previous month, according to a Bloomberg survey of 23 economists.
Bank of Canada Governor Stephen Poloz said yesterday the nation will need a rebound in business investment to drive growth in coming years, a process that will require “stability and patience,” in his first public speech since taking office June 3.
The Bank of Canada is alone in the Group of Seven in signaling that its next move may be raise interest rates and economists are anticipating Poloz won’t tighten policy until the end of next year at the earliest, in part to avoid a strengthening of the Canadian dollar that could undermine business confidence and exports.
“This is really a U.S. dollar move, so it would be wrong to characterize it as a Canada bear market,” Adam Cole, head of Group of 10 currency strategy at Royal Bank of Canada, said by phone from London. “We are still negative, and I do still think we’ll make new highs for dollar/Canada, and that will be a Canadian dollar story going forward. But, at the moment, Canada is really just caught in the crossfire.”
The Canadian dollar erased an earlier gain and is little changed in the past week against nine developed nation currencies tracked by the Bloomberg Correlation Weighted Index. Norway’s krone fell 2.9 percent to lead decliners, while the U.S. dollar paced gainers with a 2.4 percent rise.
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