Canadian Dollar Falls on Bets Japan Weakens Stimulus

The Canadian dollar fell to almost the lowest point in three weeks versus its U.S. counterpart and depreciated for a second day against the yen on speculation the Japanese currency may have dropped too much too quickly.

The Canadian currency declined against the majority of its most-traded peers, falling along with other higher-yielding assets as traders boosted bets further stimulus from Bank of Japan officials, who began a two-day policy meeting today, may fail to weaken the yen much more. Canada’s dollar, known as the loonie, trimmed losses after the federal statistics agency reported wholesale sales grew more than the median forecast in a Bloomberg News survey.

“Generally the Canadian dollar is weaker,” said Eimear Daly, a currency market analyst at Monex Europe Ltd. by phone from London. “It probably is weakening off because the Bank of Japan and expectations. The market is pricing in that we may be slightly disappointed from what we see.”

The loonie closed 0.1 percent lower at 99.29 cents per U.S. dollar in Toronto after falling to 99.35 cents, near the three-week low touched on Jan. 18 of 99.40. One loonie buys $1.00715.

Canada’s dollar fell 0.7 percent to 90.24 yen after rising to 91.485 yen on Jan. 17, the strongest since May 2010. Japan’s currency has tumbled 13 percent in the past three months, the biggest decline among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, on speculation the BOJ, under pressure from the government of new Prime Minister Shinzo Abe, will boost stimulus to weaken the currency and lift the economy out of recession.

Bond Yields

Futures for crude oil, Canada’s largest export, fell 0.1 percent to $95.47 per barrel and the Standard & Poor’s 500 stock index rose 0.3 percent.

Canada’s benchmark 10-year bonds fell, pushing the yield up one basis point or 0.01 percentage point to 1.93 percent. The 2.75 percent security due in June 2022 fell 13 cents to C$107.

Options traders became more bearish on the Canadian dollar. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against the loonie versus contracts to sell, traded as high as 0.92 percentage point today, up from the 0.83 percentage point close at the end of last week.

Canadian wholesales sales advanced 0.7 percent in November to C$49.6 billion ($49.9 billion) after a revised 0.8 percent gain in October, Statistics Canada said today in Ottawa. It was the second straight gain and the highest level since June. Economists projected a 0.5 percent gain, the median of 16 forecasts.

Reverse Diversification

The loonie has fallen 1 percent to C$1.3225 versus the euro in the last month on growing confidence the common currency will survive the debt crisis that threatened its survival last year. Investors have pushed yields on European junk bonds to their lowest since the early days of the crisis.

“The recent weakness we’ve seen is diversification trades, because we have seen this kind of move back into the euro as a risk asset,” said Monex Europe’s Daly. “Because the Canadian dollar was one of those that kind of benefited from diversification away from the euro it’s now seeing the other side of that.”

The Canadian dollar was trading below its 50- and 100-day moving averages, which it broke last week, signaling further weakness.

“The dollar certainly has some momentum against the loonie,” said Dean Popplewell, head analyst in Toronto at the online currency-trading firm Oanda Corp. by phone. “Most individuals have basically backed off currently from wanting to own the loonie at these levels. I think the market believes if it wanted to own the loonie they believe they can certainly get better levels.”

Technical analysis shows the loonie could weaken further to 99.85 cents per U.S. dollar, Popplewell said.

Before it's here, it's on the Bloomberg Terminal.