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Canada Dollar Falls From 10-Week High as U.S. Maintains Stimulus

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May 1 (Bloomberg) -- The Canadian dollar fell from a 10-week high as the Federal Reserve maintained its asset-purchase program, adding to concern a sluggish U.S. economic recovery will weigh on demand in the nation’s largest trading partner.

The currency snapped a five-day rally against its U.S. counterpart that had capped two consecutive months of gains. The Fed said it’s prepared to raise or lower the level of its asset purchases as economic conditions evolve, and repeated that bond buying will continue until the outlook for the labor market has improved substantially. The Standard & Poor’s/TSX Composite Index dropped as prices of commodities including oil, the nation’s largest export, declined.

“We may see a bit of a shakeout in risk assets, and that tends to be somewhat negative for high-beta currencies like the Canadian dollar,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “Dollar-Canada looks oversold to me at these levels.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, declined 0.1 percent to C$1.0083 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 99.18 U.S. cents. The currency earlier reached C$1.0052, the strongest level since Feb. 15.

The Bank of Canada sold C$2.9 billion ($2.88 billion) of 10-year bonds at an average yield of 1.676 percent. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.55.

Yields Decline

The previous auction of the securities, on March 27, fetched an average yield of 1.882 percent and a coverage ratio of 2.36 times, compared with the five-auction average of 2.32 times, according to central-bank data.

Yields on the current 10-year bond fell two basis points, or 0.02 percentage point, to 1.68 percent. The yield dropped as low as 1.67 percent, the least August.

The U.S. central bank said it will maintain a bond buying pace of $85 billion a month, divided between $40 billion of mortgage-backed securities and $45 billion of Treasury securities. The Bank of Canada next meets May 29.

The Fed also left unchanged its statement that it plans to hold its target interest rate near zero as long as unemployment remains above 6.5 percent and the outlook for inflation doesn’t exceed 2.5 percent.

“The implications are that the Fed is trying to be as symmetric as it can with the indication they may increase or reduce depending on the economic situation,” Osborne said. “Everyone is focusing on the increase part of that statement. There is recognition from the Fed that the focus is shifting away from tapering from asset purchases to the possibility they may have to do more.”

Oil Falls

Crude oil fell 2.5 percent to $90.95 per barrel as U.S. stockpiles swelled in the week ending April 26 to the most since the government started tracking the data in 1982.

China’s Purchasing Managers’ Index was at 50.6, the National Bureau of Statistics and China Federation of Logistics and Purchasing said today, less than the 50.7 median forecast of analysts. China is the world’s biggest consumer of metals and energy and destination for C$16.8 billion of Canadian exports in 2011.

Canada’s dollar gained yesterday after a report showed the nation’s economy expanded 0.3 percent in February, putting growth in gross domestic product on track for the fastest quarterly pace since 2011.

“GDP numbers clearly suggest the economy has more momentum than a lot of people had expected,” said John Clinkard, chief Canada economist at Deutsche Bank AG in Toronto. “I think commodity prices are going to be a key driver going forward. That’s underpinning the currency.”

To contact the reporter on this story: Cecile Gutscher in London at cgutscher@bloomberg.net

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

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