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Canada Dollar Falls First Time in Five Days on Fed-Tapering Bets

June 12 (Bloomberg) -- The Canadian dollar declined for the first time in five days versus its U.S. peer before American economic data that may add to bets the Federal Reserve will begin to taper its monetary stimulus.

The currency gained earlier to its strongest level in almost four weeks as the highest government-bond yields in more than a year bolstered demand from investors seeking greater returns. Canada’s dollar erased gains before a report tomorrow forecast to show U.S. retail sales grew 0.4 percent in May, according to a Bloomberg survey. Sentiment has increased that a strengthening economy will prompt the U.S. central bank to taper bond buying, which tends to debase the currency.

“The market is grappling with what is hopefully a harbinger of a return to normal markets after four years of unsustainable stimulus,” John Curran, a senior vice president at CanadianForex Ltd., an online foreign-exchange dealer, said in a phone interview. “Canada is caught up in this.”

The loonie, as the Canadian dollar is nicknamed for the image of the aquatic bird on the C$1 coin, ended 0.2 percent lower to C$1.0212 per U.S. dollar at 5 p.m. in Toronto after touching C$1.0156, the strongest since May 16. One loonie buys 97.92 U.S. cents.

Futures on crude oil, Canada’s largest export, gained 0.4 percent to $95.80 per barrel in New York. The Standard & Poor’s 500 Index of stocks fell 0.8 percent.

Bonds Fall

Canadian 10-year notes fell, pushing the yield up three basis points, or 0.03 percentage point, to 2.21 percent. The yield touched 2.28 percent yesterday, the highest since March 2012. The 1.5 percent security maturing in June 2023 dropped 28 cents to C$93.71.

“If you have a higher-yielding currency, then you’ll have investors moving in -- so that places a bid into the Canadian currency,” Mazen Issa, Canada macro strategist at Toronto-Dominion Bank’s TD Securities, said by phone.

Canada sold C$3.3 billion ($3.2 billion) of 1.5 percent bonds due in August 2015 today at an average yield of 1.152 percent and a coverage ratio -- the amount bid relative to the amount sold -- of 2.64 times. The previous sale of the bonds in April yielded 0.990 percent. The yield on current two-year debt added one basis point to 1.16 percent.

The Canadian currency declined versus the majority of its most-traded peers before the U.S. retail sales are forecast to rise for a second month. This comes after another report showed on June 7 that U.S. payrolls grew more than predicted in May despite higher taxes and spending cuts.

Fed Decision

Fed Chairman Ben S. Bernanke said May 22 the central bank could reduce its monthly purchases of $45 billion of Treasuries and $40 billion of mortgage bonds if the U.S. employment outlook shows a sustainable improvement. Policy makers have pledged to keep interest rates at almost zero as long as joblessness is above 6.5 percent and inflation is no more than 2.5 percent.

The central bank’s next rate decision will be June 19.

“Canada’s dollar is taking its cues from broad market developments, and we expect that it continues to be contained within a range either side of parity,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, wrote in a note to clients today.

Even as the Fed considers tapering stimulus, traders are the most confident in more than a year that the Bank of Canada is going to raise interest rates as the pace of job growth and homebuilding shatter the most optimistic forecasts.

The rate for the one-year forward overnight index swap, or OIS, this week reached 1.42 percent, more than 40 basis points more than the Bank of Canada’s target rate, the most since May 2012. The measure, which shows the market’s expectation for the one-year average central bank rate beginning in one year’s time, was predicting a rate cut last June.

Economic Rebound

Traders’ expectations are shifting on evidence the world’s 11th-largest economy is rebounding from last year’s slump. Reports in the last month showed Canadian payrolls swelled by the most in more than a decade in May, while first-quarter growth of 2.5 percent was the fastest since 2011.

The Bank of Canada, whose key interest rate of 1 percent is the highest among the Group of Seven nations, is the only G-7 central bank with a leaning, or bias, toward higher rates, a view reiterated by new central-bank Governor Stephen Poloz in his first public comments on June 6.

Canada’s currency has gained 0.4 percent in the past week against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The greenback fell 0.2 percent. The Aussie dollar led decliners, dropping 1.6 percent.

To contact the reporters on this story: Cecile Gutscher in London at cgutscher@bloomberg.net; Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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

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