Canadian Dollar Falls as Retail Sales Unexpectedly Drop

Canada’s dollar weakened for a second day against its U.S. counterpart after a report showed retail sales unexpectedly fell in June, adding to concern the country’s economy is struggling to gain momentum.

The currency pared losses after minutes from the last meeting of the Federal Open Market Committee showed U.S. policy makers remain committed to more monetary stimulus is growth doesn’t accelerate. The Canadian dollar dropped earlier against a majority of its most-traded peers, falling along with the dollars of fellow commodity exporters Australia and New Zealand as demand for safety drove the greenback and yen higher.

“The big one out there is definitely the FOMC minutes,” David Doyle, a strategist at Macquarie Capital Markets in Toronto, said in a telephone interview. “In the very near term, the next one to two weeks, you’re likely to see a continuation of this risk-on environment, which means further appreciation of the Canadian dollar. But have your eye on exiting sooner rather than later.”

Canada’s currency, nicknamed the loonie, weakened 0.2 percent to 99.14 cents per U.S. dollar at 5 p.m. in Toronto. It touched 98.43 cents yesterday, the strongest level since May 3. One Canadian dollar buys $1.0087.

Bank of Canada Governor Mark Carney reiterated that higher borrowing costs “may become appropriate” if the country’s domestic demand-driven expansion continues, even amid signs that a slowing global economy is hampering Canadian growth.

Accelerating Growth

Carney, in the text of a speech today in Toronto at a Canadian Auto Workers union convention, said growth is expected to accelerate through next year and the economy’s momentum remains in line with potential output.

“To the extent that the economic expansion in Canada continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” said Carney, 47, who is scheduled to hold a press conference at 12:00 p.m. Toronto time.

Odds that the Bank of Canada will raise rates by year end fell to about 13 percent today, from 20 percent yesterday, according to Bloomberg calculations on overnight index swaps.

The loonie pared declines after the record of the Federal Open Market Committee’s July 31-Aug. 1 gathering released today in Washington said “many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”

‘Higher-Beta Currencies’

U.S. policy makers said after the meeting that they will step up record stimulus if needed to spur growth and cut a jobless rate stuck above 8 percent since February 2009. Chairman Ben S. Bernanke will have an opportunity to clarify his views in an Aug. 31 speech at a forum for central bankers in Jackson Hole, Wyoming, where he signaled a second round of bond buying by the Fed in 2010. Fed officials next meet on Sept. 12-13.

“Higher-beta currencies are all gaining versus the U.S. dollar on the back of increased easing expectations,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc in Stamford Connecticut. “Carney reiterating that the Bank of Canada could remove stimulus is Canadian-dollar supportive.”

Canadian government bonds rose for a fourth day, sending the yield on the benchmark 10-year note down nine basis points, or 0.09 percentage point, to 1.84 percent. The price of the 2.75 percent security due in June 2022 rose 83 cents to C$108.14.

Corporate Spreads

Relative yields on Canadian corporate bonds are the tightest since May as a slowing in the more than three-year refinancing boom by companies drives investors to the safety of issuers such as banks.

The extra yield investors demand to hold the bonds of Canadian investment-grade companies rather than the federal government debt fell to 153 basis points, or 1.53 percentage points, the narrowest spread since May 9, according to Bank of America Merrill Lynch index data. Companies issued C$1.71 billion ($1.72 billion) of debt in August, set to be the smallest amount of sales in month since February 2009, according to data compiled by Bloomberg.

The loonie has rallied 2.2 percent this year versus nine developed-nation peers monitored by Bloomberg Correlation-Weighted Indexes. That’s the third-best performance behind the New Zealand dollar, up 4.1 percent, and the 3.1 percent gain by the Swedish krona. The so-called Aussie advanced 2.1 percent. The U.S. currency dropped 1.1 percent.

Slower Growth

Retail sales decreased 0.4 percent to C$38.7 billion, Statistics Canada said today in Ottawa. The result was weaker than any forecast in a Bloomberg News survey of 24 economists, which had a median projection of a 0.1 percent gain.

Other Canadian reports this month have shown declines in employment, wholesale sales and building permits along with slowing consumer-price increases.

“The data is likely to sustain some of the bid that we saw overnight in dollar-Canada,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada, in a telephone interview from Toronto. “On an intraday basis, it will likely cause the Canadian dollar to be an underperformer relative to some of its peers.”

Japan’s trade deficit was 517.4 billion yen last month, following a revised 60.3 billion yen surplus in June, the Finance Ministry said in Tokyo. The median forecast in a Bloomberg News survey of economists was for a shortfall of 270 billion yen. Exports fell 8.1 percent from a year earlier, compared with an estimated 2.9 percent decline.

“The overall trend is clearly negative,” Lutz Karpowitz, a senior foreign-exchange strategist at Commerzbank AG, said by phone from Frankfurt. “I can understand any investor who takes profits now in commodity currencies. Maybe we have to see some kind of correction before the next leg up.”

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