Canada Dollar Drops 3rd Week on Bets Risk Assets Outpace Growth

The Canadian dollar touched the weakest level in a year against its U.S. counterpart amid investor concern that gains in riskier assets have outpaced global economic growth.

The currency fell for a third week versus the greenback as U.S. jobless claims dropped and durable-goods orders rose, adding to speculation Federal Reserve Chairman Ben. S. Bernanke may slow monetary stimulus. It dropped against a majority of its 16 most-traded peers as oil, Canada’s biggest export, declined and stocks in the U.S. and Europe slid. The Bank of Canada will announce its rate decision on May 29, the final meeting for Governor Mark Carney.

“The weaker Canadian dollar is at a crossroads,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said in a telephone interview yesterday. “The U.S. dollar story, driven by Bernanke’s comments about tapering, has weighed on the currency. It remains to be seen if the move was warranted, given the data dependency. But we may have moved too far, too fast.”

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$1.0318 per U.S. dollar this week in Toronto. It reached C$1.0394, weakest since June 5, 2012. One loonie buys 96.92 U.S. cents.

Canada’s benchmark 10-year government bonds fell, with yields rising three basis points, or 0.03 percentage point, to 1.95 percent. The 1.5 percent security maturing in June 2023 fell 25 cents to C$95.94.

Net Shorts

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 1.2 percent on the week after reaching a five-week high May 20. Futures for crude oil fell 2.3 percent to $93.85 a barrel in New York. Standard & Poor’s 500 Index of stocks dropped 1.1 percent.

“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.

‘Looking Cheap’

Crude may decline in New York next week on concern global economic growth will slow and on bets 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 predicted an increase and 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. “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.”

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart reached 8.02 percent, the highest level since July 25. Traders quote and use the measure, which signals the expected pace of currency swings, to set option prices.

Central Banks

U.S. jobless claims fell by 23,000 to 340,000 in the week ended May 18, the Labor Department said, versus a forecast 345,000 in a Bloomberg survey. 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 reported, compared with a 1.5 percent increase forecast in another survey.

The Fed is buying $85 billion of Treasury and mortgage bonds each month to cap borrowing costs. Bernanke said this week the central bank 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 Carney’s tightening bias and cut interest rates.

‘No Chance’

Carney, who leaves as governor of the Bank of Canada on June 1 to become head of the Bank of England, 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.”

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. At the same time the U.S economy is expected to growth by 2 percent.

“After the recent decline in inflation, there are still question marks on if the central bank can or will maintain its hiking bias,” Mark Chandler, head of fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit, said by phone from Toronto on May 21. “Performance from here will be dictated by if the Canadian economy can hook on to the coattails of the emerging U.S. economy.”

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 dollar dropped 0.3 percent, the euro advanced 0.5 percent and the yen added 1.8 percent.

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