Canadian Dollar Falls on Concern Risk Assets Outpaced Economy

The Canadian dollar dropped for a third week against its U.S. counterpart amid investor concern that gains in riskier assets have outpaced global economic growth.

The currency weakened as orders for U.S. durable goods increased more than forecast in April, adding to speculation the Federal Reserve may slow monetary stimulus this year. Oil, Canada’s biggest export, declined for a second day on signs of rising U.S. inventories and a global economic slowdown. U.S. and European stocks fell, while Japanese shares rebounded from their largest drop since the 2011 earthquake.

“The Canadian dollar is underperforming as commodity prices continue to dip and the U.S. dollar gets stronger amid eventual Fed tapering talk, which has weighed on risk assets,” Dean Popplewell, head analyst in Toronto at the online currency-trading firm Oanda Corp., said by phone from Toronto. The durable-goods report “supports the idea of potential pullback from the Fed. And commodities are getting weaker, which suggests the currency is likely to continue to be soft.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.1 percent to C$1.0318 per U.S. dollar at 5 p.m. in Toronto. The currency, which gained 0.6 percent yesterday, the biggest increase on a closing basis since January, dipped 0.4 percent on the week. One loonie buys 96.92 U.S. cents.

Options Trading

U.S. dollar-Canada dollar was the third-most actively traded pair in the over-the-counter foreign-exchange options market today, totaling $2 billion, or 7 percent, of the $29 billion overall. Dollar-loonie options trading was 17 percent more than the average of the past five Fridays at a similar time of day. U.S. dollar-yen was most-traded at $9.6 billion.

Futures traders decreased their bets that the Canadian dollar will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 33,852 on May 21, compared with net shorts of 44,417 a week earlier.

The S&P GSCI gauge of raw materials fell 0.1 percent and dropped 1.2 percent on the week after reaching a five-week high May 20. Futures for crude oil fell 0.4 percent to $93.87 a barrel in New York. Standard & Poor’s 500 Index of stocks dropped 0.1 percent.

‘Looking Cheap’

Crude may decline in New York next week on concern that global economic growth will slow and on speculation U.S. fuel supplies will be sufficient to meet summer demand, a Bloomberg survey showed.

Twenty of 32 analysts, or 63 percent, forecast crude will decrease through May 31. Seven respondents, or 22 percent, predicted an increase. Five projected no change. Last week, 51 percent of analysts projected a decline.

“The risk sentiment and volatility has taken some of the edge out of commodity currencies,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, said in a telephone interview. “Canada’s general trend has been strong growth, but the U.S. is looking cheap as the economy turns and we get more whispers of tapering, and that will continue to reflect on the Canadian dollar.”

U.S. bookings for equipment meant to last at least three years increased 3.3 percent last month after dropping 5.9 percent in March, the Commerce Department said in Washington, versus a 1.5 percent increase forecast in a Bloomberg survey.

Central Banks

The Fed is buying $85 billion of Treasury and mortgage bonds each month to cap borrowing costs. Chairman Ben S. Bernanke said this week it may slow purchases at its next few meetings if it’s confident of sustained gains in the economy.

As the Fed debates its next move, the highest inflation-adjusted yields on Canadian government bonds in almost three months suggest that incoming Bank of Canada Governor Stephen Poloz has room to reverse Mark Carney’s tightening bias and cut interest rates.

Carney, who leaves as governor of the Bank of Canada on June 1 to become the Bank of England’s chief, said in January that there’s still room for more monetary stimulus around the world if needed, and that the task for central banks is to achieve “escape velocity” for their economies.

The focus is “turning towards Governor Carney’s last BOC meeting,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, wrote in a note to clients of the May 29 gathering. “Markets are pricing in no chance of an interest-rate change.”

Weekly Drop

Canada’s benchmark 10-year government bond yields were little changed 1.95 percent. The 1.5 percent security maturing in June 2023 traded at C$95.97.

The world’s 11th largest economy will expand 1.6 percent this year, the slowest growth since the economy contracted 2.8 percent in 2009, according to economist surveyed by Bloomberg. The U.S economy is expected to grow by 2 percent.

The Canadian dollar fell 0.7 percent this week, the second weakest performance after the dollar of Australia, another commodities exporter, among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar dropped 0.3 percent, the euro advanced 0.5 percent and the yen added 1.8 percent.

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