Canada Dollar Falls From 3-Week High on Interest-Rate Difference

The Canadian dollar fell from its strongest level in three weeks as U.S. debt maintained an interest-rate advantage over Canadian counterparts on that country’s stronger economic growth prospects.

The currency weakened for the first time in five days as the yield advantage of U.S. 10-year notes to Canadian government debt was 12 basis points, compared with a 19-basis-point difference on July 5 that was the highest since 2011. The Federal Reserve outlined a timeline last month for tapering policies that have kept interest rates low to stimulate the economy. The Canadian currency remained lower even as consumer confidence in the U.S. fell to 83.9 in July from 84.1 the previous month, according to the Thomson Reuters/University of Michigan preliminary sentiment index.

“It’s just a bounce in the U.S. dollar after the violent selloff the other day,” said David Watt, chief economist at the Canadian unit of HSBC Holding Plc, by phone from Toronto. “The market came around to the view that’s been reinforced a number of times that even though the Federal Reserve may not taper as quickly as we anticipate, talking about a potential change in direction in Federal Reserve policy is still going to unfold before most other nations.”

The loonie, as the Canadian dollar is known, dropped 0.3 percent to C$1.0395 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0326 per U.S. dollar yesterday, the strongest level since June 20. One loonie buys 96.20 U.S. cents.

Options Data

The cost to insure the Canadian dollar against declines versus its U.S. peer reached its lowest point in two months. The three-month so-called 25-delta risk reversal rate touched 1.2925, its lowest since May 10. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.

Canada’s 10-year benchmark bond rose with yields falling one basis point, or 0.01 percentage point, to 2.43 percent. The 1.5 percent security maturing in June 2023 added 10 cents to C$91.87.

Sales of floating-rate notes are at a decade-high as Bank of Montreal and TransCanada Corp. find demand from investors girding for the end of low interest rates.

Corporate-bond issues with coupons that reset based on benchmark rates rose to $33 billion this year from $17 billion during the same period in 2012, with first-half volumes the most since at least 2003, according to data compiled by Bloomberg. Bank of Montreal sold $1 billion of the debt yesterday, following a same-sized sale by Bank of Nova Scotia July 10.

Global Yields

Worldwide yields have climbed and the loonie reached its lowest point in two years as an economic rebound is giving U.S. policy makers cause to consider slowing extraordinary monetary stimulus.

“We’re getting people pulling back into the dollar even after the massive selloff we saw yesterday,” said Eimear Daly, a currency-market analyst at Monex Europe Ltd., by phone from London. “In terms of interest-rate differentials, it definitely favors the U.S. dollar over the Canadian dollar.”

The Canadian dollar reached its highest point versus its Australian counterpart in almost three years on concern China may tolerate a slower pace of expansion than officials previously indicated.

The loonie added 1.3 percent to A$1.0629, touching the highest level since August 2010, after Chinese Finance Minister Lou Jiwei said a 6.5 percent economic-growth rate wouldn’t be a “big problem.”

Oil Rises

Futures on crude oil, Canada’s largest export, rose 1.3 percent to $106.27 per barrel in New York.

The Canadian dollar had its biggest five-day gain this week since December 2011 after Federal Reserve Chairman Ben S. Bernanke said July 10 the U.S. economy still isn’t strong enough to do without monetary stimulus.

“The selloff in U.S. interest-rate markets has determined the trend,” said Adam Cole, head of G-10 currency strategy at Royal Bank of Canada, by phone from London. “The expectations of tapering and ultimately tightening may wax and wane but ultimately the bottom line is that we are now into the final stage of easy U.S. monetary policy.”

The Canadian dollar has had the second biggest increase in the past month among 10 developed nation currencies tracked by the Bloomberg Correlation Weighted Index. The loonie’s 1.1 percent gain was second only to the U.S. dollar’s 3.2 percent jump.

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