Canada Dollar Declines Amid Speculation Fed to Taper Bond-Buying

The Canadian dollar declined for a fifth time in six days versus its U.S. peer as a regional Federal Reserve president said the central bank may begin slowing monthly bond-buying as the labor market strengthens.

The currency approached an almost three-week low as San Francisco Fed President John Williams said the central bank could begin tapering its $85 billion in monthly bond-buying program known as quantitative easing “as early as this summer.” Canada’s dollar headed for a second weekly loss as the price for insurance against declines versus its U.S. counterpart traded at its highest point in eight months.

“If they stop printing money, then it’s positive for the U.S. dollar,” said Darcy Browne, managing director of currencies at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, by phone from Toronto. “It’s more or less Fed officials preparing the market for the inevitable, which is when it will come to an end.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.4 percent to C$1.0195 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0219 yesterday, the weakest since April 25. One loonie buys 98.09 U.S. cents.

Crude oil, Canada’s biggest export, gained 0.9 percent to $95.17 a barrel in New York.

Canada’s 10-year benchmark government bonds rallied, with yields falling four basis points, or 0.04 percentage point, to 1.88 percent. The 1.5 percent security maturing in June 2023 added 31 cents to C$96.51.

Risk Reversals

The three-month so-called 25-delta risk reversal rate touched 1.6 percent for the second day, the highest since Sept. 6. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

“There’s more likely to be U.S. dollar strength going forward on the assumption that growth holds up and the Fed is more inclined to taper asset purchases going forward,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “That’s probably going to keep the dollar supported.”

The loonie trimmed a decline earlier after purchases by foreigners of Canadian securities totaled C$1.19 billion ($1.17 billion) following February’s revised net sale of C$6.28 billion, Statistics Canada said in Ottawa. Canadians bought C$3.81 billion of foreign securities in March, roughly split between equities and bonds.

‘Miserable’ Data

The Canadian currency also pared losses as U.S. jobless claims jumped by 32,000 to 360,000 in the week ended May 11, exceeding all forecasts in a Bloomberg survey of economists and the most since the end of March, Labor Department figures showed in Washington. Separate reports showed that manufacturing in the Philadelphia region unexpectedly contracted in May and the cost of living in the U.S. dropped for a second month in April.

“Everything that came out from the U.S. was miserable,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, said in a telephone interview. “Though the truth of the matter is, negative data for the U.S. ultimately is negative for Canada.”

U.S. dollar-Canada dollar was the sixth-most actively traded pair in the over-the-counter foreign-exchange options market today, totaling $2.4 billion, or 5 percent, of the $46 billion overall. Dollar-loonie options trading was 56 percent more than the average of the past five Thursdays at a similar time in the day. U.S. dollar-yen was the most traded at $10 billion.

The Canadian dollar was the strongest performer in the developed world in the past month, gaining 2.6 percent against the nine counterparts tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar rose 1.8 percent, while the Australian dollar was the biggest loser, dropping 3.5 percent.

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