Canada Dollar Drops to Two-Week Low on Fed-Stimulus Speculation

The Canadian dollar fell to the lowest in almost two weeks as oil, the nation’s biggest export, slid amid bets the Federal Reserve will slow monetary stimulus that has fueled demand for riskier assets as soon as next month.

The currency sank versus most major counterparts as the central banks of Canada’s commodity-exporting peers, Australia and New Zealand, signaled steps may be taken to weaken their currencies. Canadian retail sales fell in June, data due Aug. 22 is forecast to show, following drops in employment and factory sales. The nation’s 10-year government bonds rose for the first time in seven days, pushing yields down from a two-year high.

“People are just sort of preparing for a tapering world,” said John Curran, a senior vice president at CanadianForex Ltd., an online foreign-exchange dealer, by phone from Toronto. “People are just leaning toward recent data for the Canadian dollar. When push comes to shove, you can be comfortable selling it at the levels it’s at.”

The loonie, as Canada’s currency is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated for a third day, losing 0.5 percent to C$1.0392 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0401, the weakest level since Aug. 8. One Canadian dollar buys 96.23 U.S. cents.

Canada’s currency closed weaker than its 50-day moving average for the first time since Aug. 7, a signal to some traders that there’s momentum for further losses. It will depreciate to C$1.05 by year-end, according to a Bloomberg survey of 62 economists and analysts

Bonds Climb

Benchmark 10-year government bonds gained for the first day since Aug. 9, pushing yields down six basis points, or 0.06 percentage point, to 2.68 percent. The yields touched 2.76 percent yesterday, the highest level since July 2011. The price of the 1.5 percent securities maturing in June 2023 increased 51 cents to C$89.93.

Futures on crude oil dropped as much as 2.4 percent, the biggest decline in two months, to $104.50 before paring losses to trade at $104.96.

Options traders became more bearish on the Canadian dollar. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against the loonie versus contracts to sell, rose to 1.58 percent, the highest a closing basis since July 8. The 2013 average is 1.24.

The Canadian currency declined earlier after Australia’s central bank said the Aussie dollar will be considered in setting policy and interest-rate cuts remain a possibility, while Reserve Bank of New Zealand Governor Graeme Wheeler said his country’s dollar was overvalued. The two South Pacific currencies slid versus most major counterparts.

‘Dragged Lower’

“There’s a bit of a drag from the Aussie and the kiwi performance overnight,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “The Canadian dollar has just been dragged lower by the performance of those currencies, just falling in sympathy.”

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart rose to 7.5 percent, the highest level since July 16. Implied volatility is used to set option prices and gauge the expected pace of currency swings. The average for this year is 6.8 percent.

The loonie extended its decline today as Statistics Canada reported the nation’s wholesale sales dropped 2.8 percent to C$48.8 billion ($47.1 billion), the fastest since January 2009. A Bloomberg survey forecast a 0.5 percent decline.

Retail Sales

Retail sales declined 0.4 percent in June after gaining 1.9 percent the previous month, economists in a Bloomberg survey forecast before Statistics Canada reports the data this week.

The loonie slid versus most major peers Aug. 16 after data showed manufacturing sales fell 0.5 percent in June. A report on Aug. 9 showed the nation unexpectedly lost 39,400 jobs in July.

Data in July showed retail sales, wholesale sales and housing starts increased more than forecast.

The Fed will slow its bond purchases at policy makers’ Sept. 17-18 meeting, according to 65 percent of economists surveyed by Bloomberg Aug. 9-13.

U.S. central-bank officials have been discussing when to begin tapering the pace of their $85 billion in monthly bond buying amid an improving economy. The purchases, designed to put downward pressure on borrowing costs and spur economic growth, tend to devalue the greenback.

“With QE kind of winding down, you won’t get the kind of liquidity support for riskier assets,” Emanuella Enenajor, an economist at CIBC World Markets, said in a telephone interview from Toronto.

The Canadian dollar fell 0.9 percent over the past week against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar dropped 0.5 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

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.