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Canadian Dollar Declines as Inflation Slows, Retail Sales Stall

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Canadian Dollar Declines as April Inflation Slower
The Canadian currency traded at 96.90 cents versus the U.S. dollar at 7:24 a.m. in Toronto, from 96.76 cents yesterday. One Canadian dollar buys $1.0320. Photographer: Patrick Doyle/Bloomberg

May 20 (Bloomberg) -- Canada’s dollar dropped for the first time in four days after government reports showed inflation slowed more than economists forecast and retail sales unexpectedly stalled.

The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, fell for a third week in the longest losing streak this year on reduced speculation that the Bank of Canada will resume boosting borrowing costs. The Canadian dollar weakened against most of its major counterparts including the yen and pound.

“The risks are primarily tilted for a weaker Canadian dollar,” said John Shin, senior G-10 foreign-exchange strategist at Bank of America Merrill Lynch in New York. “Unless you got some type of substantial reversal back upward in oil prices, this is where we think you get into a longer-term softening period for the Canadian dollar.”

Canada’s currency depreciated 0.7 percent to 97.42 cents versus the U.S. dollar at 5 p.m. in Toronto, from 96.76 cents yesterday. It fell 0.6 percent for the week. One Canadian dollar buys $1.0265. The Canadian dollar rallied on April 29 to 94.46 cents, the strongest since November 2007.

The consumer price index increased 0.3 percent in April after a 1.1 percent gain in the previous month, Statistics Canada reported today. The median forecast of 27 economists in a Bloomberg News survey was for a 0.5 percent advance.

Inflation Outlook

“The market was expecting something a little higher for CPI,” said Blake Jespersen, director of foreign exchange at Bank of Montreal in Toronto.

Consumer prices rose 3.3 percent from a year earlier, matching the annual rate of advance in March. Economists predicted a 3.4 percent increase.

The index will be “above 3 percent in the short term,” Bank of Canada Governor Mark Carney said in a speech on May 16 in Ottawa. Carney reiterated that annual inflation would slow to 2 percent by mid-2012.

The central bank on April 12 kept its target rate for overnight lending between commercial banks at 1 percent, where it has been since September, after raising it three times last year. Royal Bank of Canada economists forecast policy makers will leave the rate unchanged at their May 31 meeting before raising it in July.

The yield on Canada’s two-year bond slumped as much as nine basis points to touch 1.60 percent, the lowest level since March 18, before trading at 1.69 percent. A basis point is 0.01 percentage point. The price of the 1.75 percent security maturing in March 2013 rose 13 cents to $100.25.

U.S. Yield Spread

The difference in yield between Canadian two-year bonds and Treasuries of equivalent maturity decreased to 110 basis points, the narrowest in two weeks.

September 2011 bankers’ acceptance contracts yielded 1.42 percent, the least since August on a closing basis. So-called Bax contracts average about 18 basis points above the central bank’s overnight target, Bloomberg data since 1992 show.

The trading indicates there’s about a 44 percent chance that the target lending rate will rise by a quarter-percentage point at the Sept. 7 Bank of Canada policy meeting, compared with odds of about 72 percent yesterday, according to David Love, a trader of interest-rate derivatives at the brokerage Le Groupe Jitney Inc. in Montreal.

“The Street was really worried about a higher-than-expected number,” said Love, referring to the consumer price index. “That didn’t happen, so BAX popped a bit,” meaning yields fell, indicating lower rate-increase expectations.

Stalled Retail

Canada’s currency extended losses after a report showed retail sales were little changed in March, a result that was weaker than all of the forecasts in a Bloomberg News survey.

Sales were a seasonally adjusted C$37.3 billion, the statistics agency said today. Retail sales were forecast to grow 0.9 percent, according to the median estimate of 26 economists surveyed by Bloomberg News.

“Today’s lower CPI and retail sales confirm a sidelined Bank of Canada,” said Michael Leavitt, a Montreal-based institutional-derivatives broker at MF Global Canada Co. “The Canadian dollar will suffer for it over the short term.”

The loonie depreciated 0.5 percent to 83.88 yen and weakened 0.6 percent to C$1.5809 versus the pound.

Crude oil futures for June delivery increased 1.1 percent to $99.49 a barrel in New York after dropping as much as 2.5 percent to $95.99.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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

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