Canada Currency Tumbles as Europe Crisis Overshadows Data

Canada’s dollar dropped the most since November, falling for a third straight week as concern Europe’s debt crisis will worsen overshadowed government data showing inflation and factory sales rose more than forecast.

The currency touched a four-month low versus its U.S. counterpart, which rose against all of its 16 most-traded peers except the yen on demand for safety. Commodities dropped. Economists predicted a report next week will show retail sales in Canada rose in March.

“Canadian metrics are very positive -- employment, housing, inflation -- but these external headwinds are far too great,” Dean Popplewell, chief strategist in Toronto at the online currency-trading firm Oanda Corp., said in a telephone interview yesterday. “It’s having a compounding effect on all high-yielding, commodity-sensitive currencies.”

The loonie, as Canada’s currency is nicknamed for the image of the aquatic bird on the C$1 coin, slid 2.1 percent to C$1.0222 per U.S. dollar yesterday in Toronto, from C$1.0005 on May 11. It was the biggest drop since Nov. 4. The currency touched C$1.0227, the weakest level since Jan. 16. One Canadian dollar buys 97.83 U.S. cents.

The currency will strengthen to parity by the end of June before gaining to 98 cents by year-end, according to the median forecast in a Bloomberg News survey of 41 economists.

Bonds Rise

Ten-year government bonds rose for a third week, the longest stretch in more than two months, pushing the yield down eight basis points, or 0.08 percentage point, to 1.89 percent. It touched 1.873 percent on May 17, the lowest level this year.

The loonie had its biggest intraday jump in a week yesterday after Statistics Canada reported the consumer price index rose 2 percent in April from a year earlier. A Bloomberg survey forecast it would remain unchanged at 1.9 percent.

Bank Governor Mark Carney said last month interest-rate increases may be necessary as growth and inflation outpace his earlier projections, and as slack disappears from the economy. Policy makers have kept the benchmark rate at 1 percent since September 2010.

Odds of a rate boost by year-end rose to 46 percent yesterday after the inflation report, from about 41 percent the day before, according to Bloomberg calculations on trading in overnight index swaps.

Canadian manufacturing sales rose in March at the fastest pace in six months, Statistics Canada reported on May 16. They climbed 1.9 percent after falling in the previous two months, the data showed. Sales of existing homes rose for a third month in April, the Canadian Real Estate Association said on May 15.

Job Growth

The gains followed data last week showing Canadian payrolls had the biggest two-month gain in 30 years in March and April.

Retail sales rose 0.3 percent in March, after an unexpected drop in February, a Bloomberg survey forecast before Statistics Canada reports the data on May 23.

“The U.S.-Canada exchange rate remains biased higher,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, wrote in a note to clients yesterday. “That is, at least until risk aversion subsides, but there seems scant reason for that during the rest of the first half at the very least.”

Both CIBC’s Stretch and Oanda’s Popplewell recommended buying the U.S. dollar versus the Canadian currency.

“Realistically, Canada will be the first Group-of-Eight country to hike interest rates, but there are too many unknown variables out there,” Popplewell said. “There are a few larger positions caught offside. With dollar-Canada at these levels, we could see it a bit higher.”

Net Longs

Stretch said he sees “additional topside impetus into next week,” with the greenback rising to as high as C$1.0320.

The difference in the number of wagers by hedge funds and other large speculators on an advance by the Canadian dollar versus its U.S. counterpart compared with those on a drop -- so-called net longs -- was 51,005 in the week ended May 15, down from 60,095 a week earlier, figures from the Washington-based Commodity Futures Trading Commission showed.

Implied volatility for one-month options on the Canadian dollar versus the greenback increased yesterday to the highest level since Jan. 6, 10.31 percent, after falling to 6.59 percent on April 30. The five-year average is 12 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

The loonie posted its biggest intraday drop in a week on May 17 after weaker-than-forecast economic data from the U.S., Canada’s biggest trade partner. A Philadelphia-region factory gauge and the leading-indicators index both unexpectedly fell.

Relative Strength

The U.S. dollar rose to 73.1 yesterday on the 14-day relative strength index against the Canadian currency, the highest since October. A reading above 70 signals an asset may be due to reverse direction.

The loonie gained 1 percent over the past three months against nine developed-nation peers monitored by Bloomberg Correlation Weighted Indexes. The U.S. dollar was up 3.9 percent, and the euro rose 0.8 percent. Australia’s dollar slid 5.4 percent, and Sweden’s krona lost 2.8 percent.

“The way the market has traded the Canadian dollar over the past few weeks, it makes it clear it’s being viewed as a safe haven relative to the Australian dollar, the euro, to the Scandinavian currencies,” Greg Anderson, the North American head of Group-of-10 nations currency strategy at Citigroup Inc., said yesterday by phone from New York.

President Barack Obama called Europe’s debt crisis an issue of “extraordinary importance” to the global economy and said fiscal responsibility should be coupled with policies to promote growth. He spoke yesterday before joining Group of Eight leaders at a summit at Camp David, Maryland.

Greek political leaders began campaigning for the June 17 election after a rise in support for anti-austerity parties scuttled the formation of a government.

Crude oil, Canada’s biggest export, fell for a third week. June futures dropped 4.2 percent to $91.39 per barrel in New York. Raw materials account for half of Canada’s export revenue.

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