Canada Dollar Declines as Economic Recovery Trails U.S. Growth

Canada’s dollar fell for the first time in five days versus its U.S. peer after data showed sales at American retailers rose in February by the most in five months, a sign of the diverging economies of the two nations.

Canada’s currency initially erased a drop as the 1.1 percent retail-sales advance exceeded all projections in a Bloomberg survey and followed a revised 0.2 percent gain in January, Commerce Department figures showed. The U.S. is Canada’s largest trading partner. The so-called loonie fell against the yuan amid concern policy makers in China, Canada’s third largest destination for exports, will expand efforts to to cool the local housing market.

“The trend in dollar/Canada is still higher” for the greenback, said David Bradley, director of foreign exchange trading at Scotia Capital Inc., a unit of Bank of Nova Scotia, by phone from Toronto. “Some of the language the Bank of Canada has been using has been negative for the Canadian dollar, and we’ve had a lot of negative economic releases -- apart from last week’s employment data -- which has been negative for the Canadian dollar.”

The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, fell 0.2 percent to C$1.0276 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 97.31 U.S. cents. On March 1 it reached C$1.0342, its lowest point since June 29.

Futures on crude oil, the nation’s biggest export, declined 0.1 percent to $92.49 per barrel. Western Canada Select, the benchmark for oil-sands bitumen, traded at a discount of $19.50 to U.S. West Texas Intermediate price, down from $23.75 the week before. The discount reached $42.50 on Dec. 14.

Yield Spread

Canada’s benchmark 10-year government bonds fell, with the yield rising one basis point, or 0.1 percentage point, to 1.92 percent. The 2.75 percent security maturing in June 2022 slid 7 cents to C$107.03.

Yields on Canada’s 10-year debt fell below their U.S. counterparts on Feb. 21 and the spread today was 10 basis points, or 0.10 percentage point, almost the largest differential since March 2011, making long-term Canadian debt a less attractive investment than American.

The Bank of Canada auctioned C$1.5 billion ($1.46 billion) of 30-year bonds today, drawing an average yield of 2.62 percent, up from 2.289 percent at the last auction on Nov. 28. The 3.5 percent securities will mature in December 2045.

Implied volatility for three-month options on the greenback versus the Canadian dollar fell for a fifth day to 6.26, the least since Feb. 20. Implied volatility signals the expected pace of currency swings and is quoted by traders to set prices.

China ‘Alert’

The loonie declined against the yuan as central bank Governor Zhou Xiaochuan said China should be on “high alert” over inflation after February’s figures exceeded forecasts, signaling a heightened focus on controlling prices.

Zhou’s comments add to signs that officials are tightening policies even as the recovery in the world’s second-biggest economy shows signs of weakness. While the People’s Bank of China has left interest rates and lenders’ reserve requirements unchanged since July last year, the government this month intensified a campaign to control home prices.

Canada’s dollar fell 0.2 percent to 6.0473 yuan.

Selling Loonies

“The overwhelming trend is that people are looking for Canadian data to be less impressive in coming months, and it already has been not great,” said John Curran, senior vice president at CanadianForex Ltd., an online foreign exchange dealer, by phone from Toronto. “So they’re happy to start selling Canadian dollars whenever they can.”

Gross domestic product and inflation numbers below analysts’ forecasts prompted Bank of Canada Governor Mark Carney to say interest-rate increases were “less imminent” on Jan. 23 and to add the current rate would be “appropriate for a period of time” on March 6. Interest-rate decreases tend to debase the currency.

One bright spot came from employment reports on March 8, when both the U.S. and Canada added more jobs than forecast as unemployment rates were at four-year lows. The loonie gained for four straight days after the data.

The loonie has fallen 1.2 percent in the past three months against nine developed-nation currencies tracked by the Bloomberg Correlation Weighted Indexes. Only the yen and the pound have fallen more, at 11 percent and 5.4 percent. The U.S. dollar has gained 3.5 percent.