Canadian Dollar Snaps Four-Day Rally as Risk Appetite Wanes

The Canadian dollar fell for the first time in five days as crude oil, the country’s largest export, fell along with commodities and equities as sentiment turned against riskier assets.

The currency weakened from a one-month high as oil and the Standard & Poor’s/TSX Composite Index (SPTSX) of Canadian stocks had their biggest loss on a closing basis in a month. It rose earlier after a report yesterday showed sales in May increased 1.9 percent, almost double the highest forecast in a Bloomberg survey of 20 economists, which had a median projection of 0.4 percent. The Bank of Canada sold two-year debt at a yield of 1.230 percent.

“Some of the real fast money had gotten short dollar/CAD and short on a couple of other axes too, and with equities selling off, with bonds selling off, with sovereigns in Europe selling off people just liquidated those short-term positions,” said Greg Anderson, head of global foreign-exchange strategy at Bank of Montreal. “We just put in the bottom in dollar/CAD and I’d be long dollars and short CAD here.” A short position is a bet that an asset will decline in value.

The loonie, as the Canadian dollar is known, fell 0.3 percent to C$1.0316 per U.S. dollar at 5:12 p.m. in Toronto. It earlier strengthened as much as 0.2 percent to C$1.0263, the highest since June 19. One loonie buys 96.94 U.S. cents.

The currency briefly traded stronger than its 100-day moving average of C$1.0268 per U.S. dollar for the first time in a month.

Bonds Fall

Canada’s benchmark 10-year government bonds fell, with yields rising seven basis points, or 0.07 percentage point, to 2.48 percent. The 1.5 percent security maturing in June 2023 lost 60 cents to C$91.51.

Canada’s auction of C$3.3 billion ($3.2 billion) of debt due in November 2015 with a coupon of 1 percent had a bid-to-cover ratio of 2.595 times, the lowest ratio since February, according to Bank of Canada data.

Futures on crude oil, Canada’s largest export, fell 1.8 percent to $105.34 per barrel after earlier reaching the biggest decline in a month. The discount for Canadian heavy oil compared with U.S. benchmarks was $21.25, almost the lowest since May 10.

The Standard & Poor’s Index of U.S. stocks declined 0.4 percent and SP/TSX’s 0.6 percent drop was the most on a closing basis since June 24.

American Economy

Sales of new U.S. homes rose in June to the highest level in five years, pointing to gains in residential construction that will support the economic expansion in the second half of the year. Purchases (NHSLTOT) climbed 8.3 percent to an annualized pace of 497,000 homes, the highest level since May 2008, the Commerce Department said today in Washington. The median estimate of 77 economists surveyed by Bloomberg called for a gain to 484,000.

“The market is very much undecided on the strength of the U.S. economy so even when we get these second-tier indicators, like the numbers we had today, you get this outsized reaction,” said Adam Button, a currency analyst at forexlive.com, by phone from Montreal. “It’s very much a U.S. dollar-driven market. For the last two weeks the U.S. dollar has been in the driver’s seat and every other currency has been along for the ride.

The cost to insure against declines in the Canadian dollar versus its U.S. peer rose after touching its lowest point in almost two months yesterday. The three-month so-called 25-delta risk reversal rate reached 1.1875 percent. It touched 1.1150 yesterday, the lowest since May 5. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Fund Flows

The loonie, which had rallied since reaching an almost two-year low on July 5, has benefitted from the strongest international inflows of all developed market currencies into Canada’s stocks and bonds, Samarjit Shankar, a senior currency strategist at the Bank of New York Mellon Corp. wrote in a note to clients.

Flow data shows Canadian debt has benefitted from a recently installed central bank governor who has pushed back expectations of higher rates as portfolio managers and central banks search for shelter from volatility in the U.S. Treasury market, Shankar wrote.

The Canadian dollar has risen 1.2 percent in the past month against nine other developed nation currencies tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar has lost 1 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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