Canadian Dollar Rallies to 1-Month High on Retail-Sales Forecast

The Canadian dollar reached the highest level in a month along with the price of commodity export gold before a government report tomorrow that is forecast to show retail sales accelerated in May.

The currency gained as data last week revealed faster inflation in June, even as consumer-price gains remained below the Bank of Canada’s 2 percent target. The U.S dollar tumbled against all its major peers after Fed Chairman Ben S. Bernanke’s said last week the central bank seeks to assure the economy and labor markets have sufficient momentum before reducing its $85 billion in monthly bond purchases.

“You’re going to get patches where the Canadian economy looks a little bit healthier, you’re going to get patches where commodity prices are in the Canadian dollar’s favor and you’re going to get patches where the U.S. dollar is out of favor,” said Doug Porter, chief economist at the Bank of Montreal, by phone from Toronto.

The loonie, as the Canadian dollar is known, rose 0.3 percent to C$1.0334 per U.S. dollar at 5 p.m. in Toronto. Earlier it touched C$1.0322 per U.S. dollar, the highest level since June 20. One loonie buys 96.77 U.S. cents.

Gold rose 3.1 percent to $1,335.82 per ounce, the highest since June 20. Canada is home to the world’s two biggest gold producers by market value. Goldcorp Inc. is the biggest by market value and Barrick Gold Corp. is the second biggest.

Moving Average

The currency traded stronger than its 50-day moving average of C$1.0353 for the first time since June 19. Breaching moving averages signal to some traders a move has momentum to continue.

The cost to insure against declines in the Canadian dollar versus its U.S. peer was at almost its lowest level in more than two months. The three-month so-called 25-delta risk reversal rate fell to 1.1275 percent. It touched 1.1225 percent July 15, the 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.

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart was at 6.87 percent, the lowest level since May 15. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

“On days when the dollar is soft generally Canada will tend to go up against the dollar and down against other currencies and that’s what we’re seeing,” said Adam Cole, head of Group of 10 currency strategy at Royal Bank of Canada, by phone from London. “The general theme running through markets is the dollar has pulled off the highs somewhat as U.S. tapering and tightening expectations have perhaps gotten a little bit stretched.”

Bond Yields

Canada’s benchmark 10-year bond was little changed with yields at 2.35 percent. The 1.5 percent security maturing in June 2023 traded at C$92.54.

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

Futures of crude oil, Canada’s biggest export, fell 1.1 percent to $106.91 per barrel in New York, while remaining above the $100 per barrel level for the 13th straight day. The discount on Canadian heavy oil compared with the U.S. benchmark widened to $22, the largest gap since May 10.

The Standard & Poor’s 500 Index of U.S. stocks added 0.2 percent while the Standard & Poor’s/TSX Composite Index rose 0.4 percent, following a fourth straight week of gains.

Economic Performance

Canadian retail sales increased 0.4 percent in May from 0.1 percent the month before, according to a Bloomberg survey of 20 economists.

The consumer price index rose 1.2 percent from a year ago following a 0.7 percent gain in May, Statistics Canada said last week, bringing it within the bottom end of the Bank of Canada’s target band of one to three percent.

“It does say we’re not falling off any kind of cliff and there’s not strong worries for the Canadian consumer,” said Greg T. Moore, a currency strategist at Toronto-Dominion Bank, by phone from Toronto. “Inflation is quite low, it’s at the bottom end of the target range, and it will take a considerable time to get out of that trough.”

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