Canada Dollar Falls on Fed View to Trail Higher-Yielding Assets

Canada’s dollar fell against the majority of its most-traded peers as the Federal Reserve damped speculation reduced monetary stimulus was imminent, crimping demand for the currency versus other higher-yielding assets.

Mexico’s peso led those that rallied against Canada’s currency this week even as crude oil, the nation’s largest export, reached a 16-month high and equities gained. Stephen Poloz at his inaugural policy meeting as Bank of Canada governor kept the benchmark rate at 1 percent, the 23rd in a row with no change. Statistics Canada may report July 23 that May retail sales rose the most since February.

“We are seeing consolidation here with the Canadian dollar against the U.S. dollar,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said in a telephone interview. “To see the South African rand and the Mexican peso do a little bit better after Bernanke’s comments, that’s something that’s usually the case. We saw U.S. yields move lower and when that happens that’s positive for emerging markets.”

The loonie, as the currency is nicknamed for the image of the waterfowl on the C$1 coin, climbed 0.3 percent to C$1.0368 per U.S. dollar in Toronto, the second weekly advance. It weakened 2.2 percent against the Mexican peso and 2 percent versus Sweden’s krona. One loonie buys 96.45 U.S. cents.

Price Swings

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart reached 7 percent, the lowest since May 16. Implied volatility, used to set option prices and gauge the expected pace of currency swings, reached a one-year high of 8.87 percent on June 24.

Hedge funds and other large speculators 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 on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 20,043 on July 16, compared with net shorts of 23,829 a week earlier.

Futures traders raised bets Mexico’s peso will strengthen versus the U.S. dollar. Long positions that profit from an increase in an asset were cut to almost zero the week before after reaching a record high 151,665 in January.

Canada’s central bank has kept its key lending rate at 1 percent since September 2010. Poloz inserted a line in his monetary-policy report released July 17 saying almost-record low interest rates are appropriate “as long as” there is significant economic slack in the economy, low inflation and households continue to repair their balance sheets.

Economic Outlook

The central bank raised its economic growth forecast for this year to 1.8 percent from an April prediction of 1.5 percent, while lowering the 2014 projection to 2.7 percent from 2.8 percent. Both figures exceed Bloomberg consensus forecasts of 1.7 percent and 2.4 percent.

The Standard & Poor’s 500 Index of U.S. stocks rallied 0.7 percent. Crude gained 2.3 percent to close at $108.43 a barrel in New York and touched the highest level since March 1, 2012.

Western Canada Select, the benchmark for oil-sands bitumen, traded at a discount of $17.50 to U.S. West Texas Intermediate prices, up from $9.25 on June 12, the low for the year.

“The buoyance in equities and commodity markets and more particularly the WTI crude, and looking at the lack of outperformance of the Canadian dollar, it’s telling that the correlations have broken down,” Jack Spitz, Toronto-based managing director of foreign exchange at National Bank of Canada, said in a phone interview. “They have taken a backseat to the relative performance of the U.S. dollar.”

Fed View

Fed Chairman Ben S. Bernanke said he’ll take a wait-and-see stance on monetary stimulus. He said last month the purchases may slow this year and stop in the middle of next year if economic growth meets policy makers’ projections.

Yields on 10-year Treasuries slipped 10 basis points this week, after declining 16 basis points in the previous five days, the biggest back-to-back drop since the period ended Aug. 31. It touched an almost two-year high of 2.75 percent on July 8.

“Canada underperformance comes on the back of repositioning into Treasuries, into U.S. equities,” Spitz said. “We’ve seen that performance take precedence, price-action wise, over the relative performance of a currency like Canada.”

Canadian government 10-year bonds rose, pushing yields down seven basis points, or 0.07 percentage point, to 2.36 percent. The 1.5 percent security maturing in June 2023 climbed 63 cents to C$92.50.

The country will auction C$3.3 billion ($3.2 billion) of notes due November 2015 on July 24.

Consumer Demand

Retail sales increased 0.4 percent in May, according to the median forecast of 19 economists surveyed by Bloomberg. Sales grew 0.1 percent in April, Statistics Canada said, short of estimates for a 0.2 percent gain.

The consumer prices index rose 1.2 percent in June from a year earlier, compared with a 0.7 percent rate in May, Statistics Canada said yesterday. It remained below the Bank of Canada’s 2 percent target.

“In Canada, we don’t really have much of an inflation problem at all,” Camilla Sutton, head of currency strategy at Bank of Nova Scotia, said by phone from Toronto. “We have a disinflation problem where we’ve seen inflation fall well below the central bank’s target.”

The loonie lost 1.9 percent in the past 12 months against nine developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The yen fell 23.1 percent, while the U.S. dollar is up 1.3 percent.

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