Canada Dollar Tumbles to Six-Week Low After FOMC Backs Tapering

The Canadian dollar dropped to a six-week low after after Federal Reserve meeting minutes showed officials in broad agreement to start tapering bond purchases later this year.

Canada’s currency fell for a fourth day, the longest decline since June, as the minutes pointed to consensus on an exit from record stimulus that had fueled demand for riskier assets. Fed officials were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing bond buying later this year if the economy improves, with a few saying tapering might be needed soon, minutes of their last meeting show.

“Now that some of the uncertainty around the Fed is removed, pent-up cash is finding its way into the U.S. dollar,” Adam Button, a currency analyst at forexlive.com, said by phone from Montreal. “The commodity bloc in general is vulnerable and that will weigh on the Canadian dollar. At the moment, the story is purely dollar strength.”

The loonie, as Canada’s currency is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated 0.8 percent to C$1.0474 per U.S. dollar at 5 p.m. in Toronto after touching C$1.0483, the weakest level since July 10. One Canadian dollar buys 95.48 U.S. cents.

Benchmark 10-year (GCAN10YR) government bonds fell, pushing yields up seven basis points, or 0.07 percentage point, to 2.75 percent, approaching the two-year high of 2.76 percent on Aug. 19. The price of the 1.5 percent securities maturing in June 2023 dropped 58 cents to C$89.35.

The Bank of Canada auctioned C$3.3 billion ($3.2 billion) of two-year bonds at an average yield of 1.271 percent. The sale drew C$9.38 billion of bids, for a bid-to-cover ratio, a gauge of demand, of 2.84. The 1 percent debt matures in November 2015.

September Taper

Fed policy makers will probably reduce monthly purchases at their Sept. 17-18 meeting, according to 65 percent of 48 economists in an Aug. 9-13 Bloomberg survey. The median estimate called for a cut to $75 billion each month.

“We believe the Fed will start to taper in September and therefore we do expect the Canadian dollar to weaken down to C$1.06, C$1.07 in the next month or two,” Blake Jespersen, managing director of foreign exchange at Bank of Montreal, said by phone from Toronto before the Fed minutes were released.

Canada’s currency will depreciate to C$1.05 by year-end, according to a Bloomberg survey of 62 economists and analysts.

Oil Drops

Futures on crude oil declined for a third day after sliding 2 percent yesterday, the most since June 20. They fell 1 percent today to $103.86 a barrel in New York, the lowest since Aug. 9, after reaching a 16-month high of $109.32 in July.

“It seems the bounce we’ve had in commodity currencies has generally not proved very robust and has already turned around,” Adam Cole, head of Group of 10 currency strategy at Royal Bank of Canada, said by phone from London. “It’s all wrapped up in Fed expectations.”

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart rose to 7.68 percent in its fourth daily gain, the longest stretch of increases since June 24. 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.

Statistics Canada will report tomorrow that retail sales in June fell 0.4 percent after a gain of 1.9 percent in May, according to a Bloomberg survey of economists. The nation’s wholesale sales dropped 2.8 percent in June, data showed yesterday, versus a forecast in a Bloomberg survey for a 0.5 percent decline.

Canadian consumer prices increased less than the central bank’s 2 percent inflation target in July for a 15th straight month, a separate survey forecast that an Aug. 23 government report will say. The consumer price index advanced 1.4 percent from a year earlier, from 1.2 percent the prior month, economists in the survey estimated.

To contact the reporter on this story: Cecile Gutscher in Toronto at cgutscher@bloomberg.net

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

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