Canadian Dollar Falls From Month-High Before Fed Stimulus Update

The Canadian dollar fell from its highest level in a month on speculation Federal Reserve policy makers may provide clues tomorrow about when the U.S. central bank plans to slow monetary stimulus.

The currency weakened against the majority of its most-traded peers as the Fed is forecast to leave the benchmark interest rate at zero to 0.25 percent and continue its $85 billion per month bond-buying program. OAO Uralkali, the world’s largest potash producer, ended limits on production that have underpinned prices for Canada’s exports of the commodity. A report tomorrow will show Canada’s gross domestic product grew 0.3 percent in May compared with 0.1 percent the previous month, according to a Bloomberg survey of 20 economists.

“The gradual shift here is to some sort of policy normalization,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “It’s time to take the patient off life support as we keep saying, and just move it to intensive care.”

The loonie, as the Canadian dollar is nicknamed, fell 0.4 percent to C$1.0305 per U.S. dollar at 5:01 p.m. in Toronto. Yesterday, the currency touched C$1.0253 per U.S. dollar, the strongest since June 19. One loonie buys 97.04 U.S. cents.

The Canadian dollar has gained 2.1 percent against its U.S. peer this month while dropping 3.7 percent this year.

Bond Yields

Canada’s 10-year benchmark government bonds fell, pushing the yield up two basis points, or 0.02 percentage point, to 2.51 percent. The 1.5 percent security maturing in June 2023 fell 15 cents to C$91.24. Yields have added seven basis points in the past month.

Futures on crude oil, Canada’s largest export, fell 1.4 percent to $103.12 per barrel, the third straight decline.

The loonie fell on lower prices for potash, a commodity that makes up about 1.5 percent of good exports in Canada, Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce, wrote in a note to clients today.

A drop in potash volumes as buyers wait for the price to drop could result in 0.1 percent off of real gross domestic product, or 0.4 percent the annual rate, Shenfeld wrote.

A plan for a one-time transition fee to repatriate $2 trillion in foreign earnings of U.S. corporations that President Barack Obama will announce today also contributed to the Canadian dollar’s weakness, Camilla Sutton, head of currency strategy at Bank of Nova Scotia, said in a phone interview.

Technical Levels

A technical measure approached levels that would indicate the loonie has appreciated too far too fast. The 14-day relative strength index for the Canadian dollar against its U.S. counterpart touched 61.3, almost the 70 level that some traders take as a signal a move is about to reverse course.

“The Fed will eventually start to pull back on their program and the Canadian dollar will weaken off,” said Blake Jespersen, managing director of foreign exchange at Bank of Montreal, by phone from Toronto. “Our bias is to look for good opportunities to sell the Canadian dollar on rallies.”

Jespersen recommended waiting until the loonie strengthens to C$1.0180 per U.S. dollar before selling.

The loonie has gained 0.7 percent in the past month against nine other developed nation currencies tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar has lost 1.5 percent.

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