Canada Dollar Declines as Investors Avoid Risk; Bond Yields Fall

The Canadian dollar weakened against most of its major counterpart, as the nation’s 10-year bond yields declined to a record low.

Canada’s currency fell after U.S. retail sales unexpectedly declined for a third month. The Bank of Canada meets tomorrow, and policy makers are expected to hold interest rates at current levels, while Federal Reserve Chairman Ben S. Bernanke testifies before Congress. Foreign investors purchased a record C$26.1 billion ($25.7 billion) of Canadian securities in May.

“What’s bad for the U.S. is bad for Canada,” Camilla Sutton, chief currency strategist at Bank of Nova Scotia in Toronto, said in a telephone interview. “Even tomorrow if we do have a less-hawkish-than-expected central bank, we may get a further bit of weakening in Canada, but I think it proves temporary.”

The loonie, as the currency is nicknamed, fell 0.1 percent against to C$1.0150 per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys 98.52 U.S. cents.

Government 10-year bond yields fell to a record low 1.598 percent. The 2.75 percent security maturing in June 2022 rose 16 cents to C$110.31.

Sovereign-debt yields also slid to records in the U.S., U.K., France and Germany as concern the global economic recovery is slowing fueled demand for assets considered most safe.

“When there is significant attraction to triple-A-rated countries and debt, Canada tends to do really well,” Sutton said.

Overseas Demand

Foreign purchases of Canadian securities reached a record in May as demand for bonds was fed by a growing yield premium compared with U.S. debt and the currency weakened.

The May purchases of Canadian securities followed a net purchase of C$10.2 billion in April, Statistics Canada said today in Ottawa. May bond purchases of C$16.7 billion reached a three-year high, led by C$9.5 billion of existing federal government debt and another C$3.5 billion of debt from government-owned companies.

Existing home sales fell 1.3 percent in June from the previous month, the second straight month decline, the Canadian Real Estate Association said.

The Bank of Canada will meet tomorrow to discuss the country’s overnight lending rate. All 22 economists in a Bloomberg News survey estimate the central bank will hold the rate at 1 percent

“If people are expecting some easing considering economic weakness and what other central banks have done, it could be a positive for the Canadian dollar if the Bank of Canada doesn’t do anything, going against the flow,” Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc, said in a telephone interview.

Retail Slowing

Data indicated the economy in the U.S., consumer of three quarters of Canada’s exports, is slowing. Commerce Department figures showed today in Washington that American retail sales unexpectedly declined 0.5 percent. The median forecast in a Bloomberg News survey called for a 0.2 percent rise.

Fed Chairman Bernanke is scheduled to testify before the Senate Banking Committee tomorrow, discussing the outlook for the economy and monetary policy. He will speak before the House Financial Services Committee the following day.

Bank of Nova Scotia’s Sutton said Bernanke may signal a third round of the Fed’s asset purchasing program, known as quantitative easing, in the fall if U.S. economic data does not improve.

“As long as he keeps the door open and potentially widening it to QE3, I think it’s hard for the U.S. dollar to remain sustainably and materially stronger than a currency like Canada,” Sutton said.

The Thomson Reuters/Jefferies CRB Commodity Index rose 0.7 percent, while the S&P 500 index fell 0.2 percent. Crude oil futures rose 1.3 percent to $88.20 per barrel in New York.

Commodity Prices

Dean Popplewell, an analyst in Toronto at the online currency-trading firm Oanda Corp., said commodity prices have not played a significant role for the Canadian dollar and likely won’t going forward.

“Over the last week or so, the loonie has traded stronger on back of its reserve optics,” Popplewell said in a telephone interview. “I expect that to remain the same.”

Canada’s dollar will weaken to the lowest level since November in the next few months before rallying to parity versus its U.S. counterpart as slowing global growth forces central banks to provide more monetary stimulus, according to the currency’s most accurate forecaster.

“You can’t make a straight line forecast under these circumstances,” said Stefan Marion, chief economist at National Bank of Canada, citing the turmoil in global financial markets. Marion had the closest estimates on the so-called loonie for the past six quarters as tracked by Bloomberg Rankings.

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