Canadian Dollar Trades Within Cent of Seven-Week Low on Fed Bets

Canada’s dollar traded within one cent of the lowest in almost seven weeks versus its U.S. peer amid speculation on when the Federal Reserve will slow the pace of monetary stimulus in the nation’s biggest trading partner.

The currency pared losses after American durable-goods orders fell more than forecast, calling into question whether U.S. growth is strong enough for stimulus cuts. A wave of cash has flowed into reserve assets including the dollar and euro as investors pulled money from emerging-market economies boosted by Fed bond buying. Canadian gross domestic product shrank in June, a Bloomberg survey forecast before data due Aug. 30.

“We’re still seeing some outflows from the emerging-market world and those outflows end up in places like the U.S. dollar, sterling, euro and yen, and not so much in Canada,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS) in Toronto, said in a phone interview. “Canada is a little bit weaker than it was, but overall has been weakening far more than the other majors.”

The loonie, as Canada’s currency is nicknamed for the image of the aquatic bird on the C$1 coin, was little changed at C$1.0501 per U.S. dollar at 5 p.m. in New York. It declined earlier as much as 0.4 percent to C$1.0533, after touching C$1.0568 on Aug. 23, the weakest since July 9. One Canadian dollar purchases 95.23 U.S. cents.

Canada’s currency lost 1.5 percent last week, the most since the five days ended June 21, as wholesale and retail sales fell and consumer-price gains stayed below the central bank’s 1.2 percent inflation target for a 15th month.

Higher Volatility

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart was at 7.83 percent today after reaching 7.84 percent on Aug. 23, the highest 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 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 2.1 percent, and the New Zealand dollar dropped 2.5 percent, while the U.S. dollar gained 0.7 percent.

An equally weighted basket of currencies of Brazil, Russia, India, China and South Africa on Aug. 21 touched its lowest level versus the dollar since June 2010 on concern a slowing of stimulus under the Fed’s quantitative-easing strategy would intensify outflows from the currencies.

“There’s still underlying concern about tapering weighing on risk assets,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “Data isn’t helping the Canadian dollar at the moment, which may be accounting for some of the softness.”

Bonds Gain

Canada’s government bonds rose, pushing the yield on the benchmark 10-year (GCAN10YR) security down four basis points, or 0.04 percentage point, to 2.65 percent. It climbed on Aug. 23 to 2.78 percent, the highest since July 2011. The price of the 1.5 percent debt due in June 2023 added 35 cents to C$90.20.

Bookings for U.S. goods meant to last at least three years decreased 7.3 percent in July, the most since August 2012, after a 3.9 percent gain in June, the Commerce Department said today in Washington. The median forecast of economists surveyed by Bloomberg called for a 4 percent drop.

Canada’s economic output contracted 0.4 percent in June, helping pare second-quarter growth to an annualized 1.6 percent, economists in a Bloomberg survey projected before the data. The economy expanded 2.5 percent in the first quarter.

‘Weak Number’

“GDP is already forecast to be a miss,” Jack Spitz, managing director of foreign exchange in Toronto at National Bank of Canada (NA), said in a telephone interview. “The market is already expecting a weak number there. One would expect that Stephen Poloz is going to cite the weakness in the Canadian dollar as less of a headwind and probably comes as welcome relief to the Bank of Canada from an easing perspective.”

The central bank has kept its benchmark interest-rate target at 1 percent since September 2010 to support the economy. The bank’s next policy decision is scheduled Sept. 4. Bank Governor Stephen Poloz has said the world’s 11th largest economy is recovering gradually from a global recession amid spare production capacity.

The Canadian currency slid on Aug. 21 after minutes released by the U.S. central bank of its last meeting showed most policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing monetary stimulus this year if the economy improves.

Fed Purchases

The Fed’s $85 billion in monthly bond purchases have raised concern they would lead to inflation and debase the U.S. dollar. Investors are betting slower bond buying will cause the greenback to strengthen against its Canadian peer.

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

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 showed on Aug. 23. 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 9,081 a week earlier.

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 its Canadian counterpart versus contracts to sell, fell to 1.53 percent, the lowest since Aug. 15. The measure rose to 1.64 percent on Aug. 23, the highest level on a closing basis since July 2. The 2013 average is 1.25 percent.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; John Detrixhe in New York at jdetrixhe1@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.