Canadian Dollar Weakens to Seven-Month Low as Commodities Drop

Canada’s dollar weakened to the lowest level in almost seven months against its U.S. counterpart as commodities including crude oil, the nation’s biggest export, dropped amid ebbing risk appetite.

The currency fell for a fourth day, the longest losing stretch in three weeks, before reports on Feb. 22 that may add to concern the world’s 11th-largest economy is slowing. New Zealand’s dollar slumped versus all of its most-traded peers after central-bank Governor Graeme Wheeler said policy makers were prepared to step in to curb its strength.

“We’ve seen considerable weakness in the Canadian dollar,” Blake Jespersen, managing director of foreign exchange at Bank of Montreal, said from Toronto in a telephone interview. “It’s a combination of weakness in commodities and the news from New Zealand that has sparked a sell-off among commodity currencies.”

The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated 0.5 percent to C$1.0167 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0186, the weakest since July 25. One Canadian dollar buys 98.36 U.S. cents.

Canada’s government bonds were little changed. Benchmark 10-year debt yielded 2.01 percent as the price of the 2.75 percent security due in June 2022 rose 3 cents to C$106.19.

Bond Auction

The Bank of Canada auctioned C$400 million ($394 million) today of inflation-indexed bonds due in December 2044, drawing a median yield of 0.615 percent. At its last offering of the real-return bonds, on Dec. 5, the central bank sold C$700 million of the securities at a median yield of 0.3 percent.

Today’s sale attracted $1.195 billion in bids. Auction coverage, a ratio that gauges demand by comparing the amount bid with the amount sold, was 2.99. That compared with 2.59 at the December auction and an average of 2.71 at the past four sales.

Canada’s dollar has fallen 1.2 percent this year among the 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes. The U.S. dollar has gained 1.5 percent, and the euro has jumped 2.3 percent.

Implied volatility for three-month options on the U.S. dollar versus the loonie reached 6.71 percent, the highest since Jan. 28 and approaching the 200-day moving average of 6.96 percent. Implied volatility signals the expected pace of currency swings and is quoted by traders to set option prices. The five-year average is 11.6 percent.

The greenback rose versus most major counterparts today after minutes of the Federal Reserve’s last meeting showed several policy makers said the central bank should be ready to vary the pace of the monthly bond purchases it makes in an effort to fuel economic growth.

‘Economic Pressures’

The loonie fell before data this week forecast to show Canada’s inflation rate slipped to the lowest in more than three years and retail sales fell.

“Economic pressures are on the rise in Canada, that’s one of the main things pressuring the loonie,” Joe Manimbo, a market analyst at Western Union Business Solutions, a unit of Western Union Co., said by phone from Washington.

Retail sales declined 0.3 percent in December after rising for five consecutive months, according to the median forecast in a Bloomberg survey before Statistics Canada reports the data.

“The longer we stay above the C$1.01 level, it allows the loonie bears to feel more positive about their position,” Dean Popplewell, a currency analyst at Oanda Corp., said in a phone interview from Toronto. “In the short term, there’s a good chance we could penetrate the C$1.02 upper-echelon, and we may see the loonie ease off ahead of the sales figures on Friday.”

Consumer Prices

The consumer price index increased 0.6 percent in January from a year earlier, a separate Bloomberg survey showed before the report. It was 0.8 percent in December, the lowest level since October 2009.

Bank of Governor Mark Carney reiterated to lawmakers last week in Ottawa that an increase in the benchmark interest rate, which has been 1 percent since 2010 to spur growth, is less urgent because inflation has been slower than forecast and will stay below the 2 percent target rate through mid-2014.

Standard & Poor’s GSCI Index of 24 raw materials fell as much as 1.6 percent today, the biggest intraday drop since November. Crude oil for March delivery slid 2.3 percent to $94.46 a barrel in New York and reached $93.92, the lowest since Jan. 17. Raw materials including oil account for about half of Canada’s export revenue.

Commodity Currencies

The currencies of Canada’s commodity-exporting peers New Zealand and Australia fell versus most major counterparts. The kiwi, as New Zealand’s dollar is nicknamed, also slid after Wheeler said in a speech in Auckland the Reserve Bank of New Zealand can try “to smooth the peaks” of the exchange rate, spurring speculation policy makers may debase the currency.

The loonie may have weakened too much, too fast, and be due to strengthen, a technical measure indicated. The currency’s 14-day relative strength index against the U.S. dollar ended the day at 27, below the 30 level some traders see as a sign that an asset may be about to reverse direction.

The Canadian currency will strengthen to 98 cents per U.S. dollar by year-end, according to the median forecast of 47 economists surveyed by Bloomberg.

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