Canada Dollar at 6-Week Low as Global Slowing Dims Export View

The Canadian dollar traded at an almost six-week low against its U.S. counterpart on signs from Europe and China that global economic growth is slowing, undermining demand for Canada’s exports.

The currency pared losses against its U.S. counterpart after a report showed Canada’s retail sales rose more than forecast in February. Euro-area services and factory output shrank for a 15th month in April as the currency bloc struggled to emerge from a recession, adding to pressure on the European Central Bank to do more to boost growth. A report showed Chinese manufacturing expanding at a slower pace this month.

“We certainly expect the Canadian dollar to trend lower this year because of the forecast weakening in the domestic economy,” David Madani, an economist at Capital Economics Ltd., said by phone from Toronto. “As it becomes clearer the domestic economy is weaker, I think there will be speculation at some point of interest-rate cuts and that’s when the dollar will start to move lower.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, was little changed at C$1.0257 at 5:01 p.m. in Toronto, after earlier dropping as much as 0.3 percent to C$1.0285. One loonie buys 97.48 U.S. cents. The currency reached C$1.0294 on April 17, the weakest level since March 13.

Options Reading

The cost to insure against declines in the Canadian dollar was at the highest in a month. The three-month so-called 25-delta risk reversal rate rose to 1.18 percent, the most since March 12. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Canada’s benchmark 10-year government bonds dropped, with yields rising two basis points or 0.02 percentage point to 1.72 percent. The 1.5 percent security maturing in June 2023 lost 19 cents to C$97.94.

The Bank of Canada will auction C$3.3 billion ($3.2 billion) of 1.5 percent notes tomorrow. The securities mature in August 2015.

Canadian retail sales registered the biggest two-month gain since 2011, on increased purchases at gasoline stations and new car dealerships. Sales climbed 0.8 percent to C$39.5 billion ($38.4 billion), Statistics Canada said today in Ottawa, following a revised increase of 0.9 percent in the prior month. Economists surveyed by Bloomberg News forecast a 0.3 percent increase, based on the median of 21 projections.

Economic Data

“Better-than-expected retail sales has worked to the benefit of the Canadian dollar but broader issues are still at play,” Greg T. Moore, currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “Digging into the details of that sales report, it still reflects a fairly weak economic landscape.”

In volume terms, sales were little changed, suggesting gains stemmed from higher prices. That measure more closely reflects the industry’s contribution to real economic growth. Sales were up 1.5 percent from a year earlier, Statistics Canada said.

“A hesitant consumer is just one of the legs of the Canadian economy that presents obstacles to aggregate growth in 2013, with the recent soft patch in Chinese and U.S. growth being major elements to an expected cooling in Canadian growth,” Adrian Miller, director of fixed-income strategy at GMP Securities LLC, wrote in a note to clients.

Reduced Outlook

Toronto-Dominion lowered its forecast last week for the Canadian dollar to C$1.090 at the end of the year. The downgrade came after last week’s Monetary Policy Report by the central bank lowering its growth forecast for 2013.

Bank of Canada Governor Mark Carney warned on April 17 that “some modest withdrawal” of monetary stimulus “will likely be required,” while saying the current lending rate will be appropriate “for a period of time.” Canada’s so-called tightening bias, which it has clung to since April 2012, isolates it among Group of Seven nations undertaking extraordinary asset purchases and monetary easing.

Cooling emerging-market energy consumption is triggering a deeper slowdown than the government anticipated. The Bank of Canada reduced its outlook for growth this year to 1.5 percent from 2 percent because of lower business investment and projected excess capacity in the economy at least into 2015.

“A weaker Canadian dollar is already reflecting the more dovish Bank of Canada,” said Madani of Capital Economics.

The Canadian dollar has lost 0.9 percent during the past six months against nine other developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The Australian dollar has risen 1.7 percent and the New Zealand dollar has gained 6.1 percent.

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