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Canadian Dollar Drops From 13-Month High as Gauge Says Overdone

Canada’s dollar dropped from a 13-month high versus its U.S. counterpart as technical measures indicated the currency rally is approaching levels that traders say suggest it may be overdone.

The 14-day relative strength index for the Canadian dollar versus the U.S. dollar was 66.8, after touching 72.1 yesterday. A reading above 70 indicates an asset may have rallied too far, too quickly and may be due for a retracement.

“The Canada dollar had a pullback after such a push over the past few days, but it was more of a correction than a reflection of the greater economic picture,” Chris Gaffney, co-chief investment officer of EverBank Wealth Management Inc., said in a phone interview from St. Louis.

The loonie, as the currency is nicknamed for the image of the waterfowl on the C$1 coin, fell 0.3 percent to 97.62 cents per U.S. dollar at 5 p.m. in Toronto, after strengthening to 97.15 cents. It touched 97.14 cents yesterday, the highest since Aug. 4, 2011. One Canadian dollar buys $1.0248.

The currency has gained 1.4 percent against the dollar over the past five days before U.S. Federal Reserve announces its interest-rate decision tomorrow. Investors anticipate the U.S. central bank will announce a third round of bond buying, known as quantitative easing, to spur the economy of Canada’s biggest trading partner.

Linker Auction

Canadian bonds fell, with the yield on the two-year benchmark rising one basis point, or 0.01 percentage point, to 1.19 percent. The 2.25 percent bond decline 3 cents to C$101.97. The 10-year yield rose five basis points to 1.90 percent.

Yields on Canadian inflation-protected bonds, called linkers because returns are linked to inflation, reached the highest relative to U.S. linkers since March 2008 yesterday, indicating investors are paying a higher premium for inflation protection in the U.S.

Canada auctioned C$400 million ($410 million) of 1.5 percent inflation-indexed bonds due December 2044. The sale today drew an average yield of 0.537 percent and a coverage ratio -- the amount bid relative to the amount on offer -- of 3.04 times.

Canada’s previous auction of real-return bonds, on May 30, drew a median yield of 0.437 percent and a bid-to-cover ratio of 2.63 times, according to Bank of Canada data. The bonds were yielding 0.587 percent after the sale.

Losses in the Canadian dollar were limited as global stocks rallied after the top German court rejected efforts to block a permanent euro-area rescue fund. The Standard & Poor’s/TSX Composite Index rose 0.1 percent and the MSCI World Index of stocks gained 0.4 percent.

“The Canadian dollar is influenced by global risk,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said in a phone interview. “We’re seeing good corporate need to buy U.S. dollars against Canada down at these levels.”

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