Canadian Dollar Hits Low for Year Amid Lagging Economic Growth

The Canadian dollar weakened to the lowest level in a year against its U.S. counterpart as speculation increased that economic growth will lag behind that in the nation’s largest trading partner.

The currency’s first monthly decline in three came as stronger-than-forecast U.S. economic data fueled bets the Federal Reserve could pull back on stimulus. Outgoing Bank of Canada Governor Mark Carney left interest rates unchanged and retained his warning they could rise even as retail sales stagnated and the rate of inflation slowed. The nation’s unemployment rate is forecast to remain unchanged when the report is released next week.

“I’m actually very cautious about the second quarter -- a number of private-sector indicators from corporate profits to private-sector jobs make me very cautious,” said David Watt, chief economist at the Canadian unit of HSBC Holding Plc. “Exports look like they’re fading pretty sharply in Q2.”

The loonie, as the Canadian dollar is nicknamed for the aquatic bird on the C$1 coin, fell 3 percent in May to C$1.0375 per U.S. dollar, the biggest drop since February. The currency touched C$1.0421 on May 29, the lowest point since June 5, 2012. One loonie buys 96.39 U.S. cents.

Oil Declines

The loonie fell all four full weeks in May as futures on crude oil, Canada’s largest export, dropped 2 percent to $91.63 per barrel in New York on the month. The Standard & Poor’s 500 Index of U.S. stocks gained 2.1 percent.

Canada’s benchmark 10-year government bonds declined in May, with yields adding 37 basis points, or 0.37 percentage point, the most since December 2009, to 2.06 percent. Yields touched 2.11, the highest point since April 2012. The 1.5 percent security maturing in June 2023 lost C$3.24 to C$94.96.

Canada’s 10-year security closed above 2 percent for the first time since February on May 28, when a report showed U.S. consumer confidence in May reached the strongest in more than five years.

Fed Chairman Ben S. Bernanke said the week before that the central bank could cut the pace of asset purchases if officials see indications of sustained improvement in economic growth. The Fed buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on interest rates.

Fed Watch

“You’re starting to see the focus on what’s happening in the United States -- not necessarily the U.S. economy, but what’s happening with the Federal Reserve, and when the Fed might begin to curtail its asset-purchase program,” David Watt, chief economist at the Canadian unit of HSBC Holdings Plc, said by phone from New York. “As a result, you’re seeing in the foreign-exchange markets currencies that have benefited from the Fed’s liquidity injections come under pressure.”

The U.S’s April unemployment rate unexpectedly fell to a four-year low of 7.5 percent on May 3 from 7.6 percent the previous month, while retail spending bounced into positive territory on May 13, growing 0.1 percent in April after a 0.4 percent contraction the previous month.

Canada’s dollar rose on May 29 after Carney, in his last policy meeting before leaving to head the Bank of England, reiterated the bias to raise rates he has included in every policy statement since last April. Stephen Poloz succeeds him June 3.

‘Hike Rates’

Bets had increased that Carney might drop the bias as Canadian retail sales were little changed in March at C$39.5 billion ($38.4 billion) and consumer prices rose 0.4 percent in April from a year ago, down from a 1 percent gain the prior month, according to Statistics Canada.

Canada’s jobless rate is forecast to remain unchanged at 7.2 percent in May while 15,000 jobs were created, up from 12,500 in April, according to separate Bloomberg surveys before the June 7 reports.

“The way things are going, the U.S. may even hike rates before Canada -- I think people are starting to feel that way,” Darcy Browne, managing director of currencies at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, said by phone from Toronto on May 29.

The loonie was little changed in the past month against nine other developed nation currencies tracked by the Bloomberg Correlation Weighted Index. It was outstripped by the U.S. dollar’s 3.3 percent rise and the euro’s 1.8 percent gain. The Australian dollar’s 5.5 percent fall was the biggest decline, followed by the New Zealand dollar’s 5 percent drop.

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