Canadian Dollar Drops Most in Nine Weeks on Bets Economy Slowing
Canada’s dollar lost the most in more than two months as wholesale and retail sales fell and consumer-price gains stayed below the central bank’s inflation target for a 15th month, fueling concern the economy is slowing.
The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, touched a six-week low versus the U.S. dollar before data next week forecast to show Canadian gross domestic product shrank in June. The loonie fell against most major peers amid bets the Federal Reserve will slow stimulus. Government-bond yields climbed to a two-year high.
“There’s been poor Canadian data, especially retail sales, and generally weak risk appetite,” Adam Button, a Montreal-based currency analyst at forexlive.com, said yesterday in a telephone interview. “There’s been a consistent theme of disappointing economic data in Canada, and that points to risks for a downside surprise for GDP.”
Canada’s currency depreciated 1.5 percent to C$1.0496 per U.S. dollar this week in Toronto, the biggest drop since the five days ended June 21. It touched C$1.0568 yesterday, the weakest since July 9. One Canadian dollar buys 95.27 U.S. cents.
Benchmark 10-year government bond yields climbed to 2.78 percent on Aug. 22, the highest level since July 2011. For the week, yields slipped one basis point, or 0.01 percentage point, to 2.69 percent. The price of the 1.5 percent securities maturing in June 2023 added 13 cents to C$89.85.
The loonie fell 1.7 percent in the past month against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. Australia’s dollar lost 2.7 percent, and the New Zealand dollar dropped 2.2 percent, while the U.S. dollar gained 0.6 percent.
Futures traders increased for the first time in six weeks their bets the Canadian dollar will fall against its U.S. peer, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the loonie versus those on a gain -- so-called net shorts -- was 9,544 on Aug. 20, compared with net shorts of 9,081 a week earlier.
Canada’s economic output contracted 0.4 percent in June, helping to pare second-quarter growth to an annualized 1.5 percent, economists in a Bloomberg survey projected before a government report due Aug. 30. The economy expanded 2.5 percent in the first quarter.
The loonie fell on Aug. 22 for a fifth straight day as Statistics Canada reported retail sales dropped 0.6 percent in June, with flooding in Alberta and a construction strike in Quebec contributing to the slide. Sales rose a revised 1.8 percent in May. The data followed declines in Canadian wholesale and manufacturing sales in June.
“This is the third straight significant miss on the June activity numbers, setting us up for next week’s June GDP and second-quarter GDP numbers, and obviously the Canadian economy stumbled pretty significantly at the end of the quarter,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said in a telephone interview. The Bank of Canada may be “locked on the sidelines for an extended period of time.”
The central bank has kept its benchmark interest-rate target at 1 percent since September 2010 to support the economy. Its next policy decision is scheduled for Sept. 4.
A report yesterday showed Canada’s consumer price index increased 1.3 percent last month from a year earlier, less than the 1.4 percent gain forecast in a Bloomberg survey. It rose 1.2 percent the previous month. The Bank of Canada’s inflation target is 2 percent.
“July’s subdued inflation figures are consistent with an economy growing below potential, which will only reinforce the Bank of Canada’s reluctance to raise rates any time soon,” David Madani, an economist at Capital Economics Ltd. in Toronto, wrote in a note to clients.
The loonie slid the most in two months on Aug. 21, 0.8 percent, after minutes of the Fed’s last meeting showed that most policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing the American central bank’s $85 billion in monthly bond purchases this year if the U.S. economy improves.
The Fed’s asset buying has fueled growth in riskier assets amid concern the stimulus will lead to inflation and debase the U.S. dollar. Investors are betting that slower bond buying will cause the greenback to strengthen against its Canadian peer.
“Now that some of the uncertainty around the Fed is removed, pent-up cash is finding its way into the U.S. dollar,” forexlive.com’s Button said on Aug. 21. “The commodity bloc in general is vulnerable, and that will weigh on the Canadian dollar. At the moment, the story is purely dollar strength.”
Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart increased to 7.8 percent yesterday, the highest level on a closing basis 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.
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