The Canadian dollar fell to the lowest level in two years as weak exports added to concern expressed by Bank of Canada policy makers that a projected driver of economic growth has not yet materialized.
The currency depreciated for a second day before a central-bank meeting Dec. 4, when policy makers are projected to hold the benchmark interest rate at 1 percent. A report last week showed third-quarter economic growth was the fastest in two years even as exports fell, frustrating the Bank of Canada’s expectations for trade to drive growth as over-indebted consumers pare back.
“This is confirmation that the overall direction for dollar/Canada is higher still, or lower for the Canadian dollar,” Mark Frey, chief market strategist at Cambridge Mercantile Group, a global foreign-exchange and payments provider, said by phone from Victoria, British Columbia. “The market is tending to believe the overall story -- the Bank of Canada is going to remain overtly dovish -- and we should see the Canadian dollar trade heavy.”
The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, fell 0.3 percent to C$1.0644 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0654 per U.S. dollar, the lowest since October 2011. One loonie buys 93.95 U.S. cents.
The 10-year Canadian government benchmark bond fell, with yields rising five basis points, or 0.05 percentage point, to 2.61 percent. The 1.5 percent security maturing in June 2023 lost 40 cents to C$90.78.
The extra interest investors receive in U.S. 10-year government bonds compared to their Canadian counterparts was 19 basis points, near the widest point since February 2011.
The decline in the loonie has pushed the currency through the lower level of the 30-day Bollinger band, signaling a turnaround may be imminent, data compiled by Bloomberg show.
The 14-day relative-strength index for the Canadian dollar versus the greenback fell to 28, breaching the threshold of 30 that shows it may be due for a reversal.
Greenback-loonie was the fourth-most actively traded currency pair in over-the-counter options, amounting to $4.8 billion, or 7 percent of the $69 billion daily total, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Trading in the pair was 134 percent more than the average for the past five Mondays at a similar time in the day.
The loonie’s slide lower in the face of a run of positive data opens the possibility for the currency to strengthen after the central-bank meeting, Geoffrey Yu of UBS AG wrote in a note to clients. In the long run, he said, the combination of tighter monetary policy pushing rates up in the U.S. and the Bank of Canada keeping rates low to spur business spending mean the currency has to fall.
“Even without the U.S. in the picture, rebalancing the Canadian economy by definition would imply downside growth risks and keeping debt servicing ratios lower is an imperative,” he said. “USDCAD positioning needs to adjust to a ‘less-negative’ end to the year, but nothing more.”
Technical analysis suggests a fall by the Canadian currency below C$1.0658 per U.S. dollar may lead to a drop to as low as C$1.0804, Yu said, a level last reached May 2010.
The loonie extended losses today as manufacturing in the U.S., Canada’s largest trading partner, unexpectedly accelerated in November at the fastest pace in more than two years, bolstering bets the Federal Reserve will slow its monetary-stimulus program that tends to devalue the greenback.
“I’d characterize it more as U.S. dollar strength rather than specific Canada dollar weakness -- the U.S. dollar is just rampant across the board,” Adam Cole, head of Group of 10 currency strategy at Royal Bank of Canada, said by phone from London. “It is more general sentiment that the Fed is still in play on when tapering starts and the data will continue to surprise on the upside, which is what they have done for the last few weeks.”
The cost to insure against declines in the loonie versus its U.S. counterpart touched the highest in seven weeks, with the three-month 25-delta risk-reversal rate rising to 1.4425 percent, the most since Oct. 11. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite. The 2103 average is 1.26 percent.
Implied volatility for three-month options on the U.S. dollar against its Canadian peer rose to 7.3 percent, the highest since Sept. 6 on an intraday basis. The measure is used to set option prices and gauge the expected pace of currency swings. The 2013 average is 6.7 percent.
Futures traders increased their bets that the Canadian dollar will decline against the U.S. dollar to the most in almost four months, 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 compared with those on a gain -- net shorts -- was 28,780 on Nov. 26, compared with net shorts of 16,335 a week earlier. The difference reached 30,942 on Sept. 10.
“You have very little positive sentiment around the Canadian dollar, and that was revealed by the way the market reacted to a very good gross domestic product number on Friday,” Brad Schruder, director of foreign exchange at Bank of Montreal, said by phone from Toronto. “Strong data is going to be almost discounted, because the bank is still concerned about the overall health of the economy, and it’s tied directly to these export figures.”
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