Canada Dollar Falls on Bets Economy Trailing as Fed Taper Looms

Canada’s dollar fell versus its U.S. counterpart as an unexpected drop in manufacturing sales added to signs the nation’s economy is lagging behind that of its biggest trading partner.

The currency dropped this week versus most major peers while the U.S. dollar climbed as American economic data bolstered bets the Federal Reserve will start slowing stimulus as soon as next month. Retail sales in Canada declined for the first time in three months in June, a report next week is forecast to show. Yields on Canadian government 10-year bonds climbed to the highest level in two years.

“The path of least resistance for the Canadian dollar has been weakness as data that has come out from Canada has generally been on the disappointing side, especially when compared to the U.S., and as we get closer to Fed tapering,” said David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit, by phone from Toronto. “As the U.S. dollar strengthens, Canada is getting caught in the crossfire.”

The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated 0.5 percent to C$1.0336 per U.S. dollar this week in Toronto. One Canadian dollar buys 96.75 U.S. cents.

Yields on Canada’s benchmark 10-year bonds climbed as the securities’ prices fell for five straight days, the longest stretch since June. The yields climbed 23 basis points, or 0.23 percentage point, to 2.70 percent and touched 2.74 percent, the highest since July 2011. The price of the 1.5 percent debt due in June 2023 lost C$1.82 to C$89.72.

Record Drop

Foreign holdings of Canadian bonds fell by a record in June as investors retained the proceeds of maturing government securities, Statistics Canada reported yesterday. The C$19 billion ($18.4 billion) decline in the category was led by a C$10.6 billion drop in government-issued debt and another C$8.83 billion reduction in government-owned company bonds.

Canada’s currency has lost 0.7 percent this year against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar has advanced 3.9 percent, while the euro gained 5.1 percent.

The loonie traded in a one-cent range this week, between C$1.0370 and C$1.0281, amid speculation the Fed will begin slowing monetary stimulus soon.

U.S. central-bank officials have been discussing when to begin tapering the pace of their $85 billion in monthly bond purchases under the quantitative-easing strategy amid an improving economy. The purchases, designed to put downward pressure on borrowing costs and spur economic growth, tend to devalue the greenback.

Fed Chairman Ben S. Bernanke will reduce the pace of bond buying at policy makers’ Sept. 17-18 meeting, according to 65 percent of economists surveyed by Bloomberg Aug. 9-13.

Driving Dollar

The dollar rose this week against 13 of its 16 most-traded counterparts tracked by Bloomberg.

“The tapering story is the driver for the dollar, and it’s whipping around the loonie as well,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The longer-trend story for the loonie, through the end of the year, is still weakness. The Canadian economy is going to lag the U.S, and that means underperformance for the loonie.”

Canada’s currency slid versus most major peers yesterday after the nation’s statistics agency reported factory sales fell 0.5 percent in June to C$48.2 billion. Economists in a Bloomberg survey forecast a 0.3 percent increase. It was the third decline in four months, and brought the drop in manufacturing sales over the past year to 3.7 percent.

Further Softening

“The currency is likely to continue to soften,” Doug Porter, chief economist at the Bank of Montreal, said yesterday by telephone from Toronto. “The manufacturing-sales number reinforces the point that June was a weak month for the economy.”

The data followed a report Aug. 9 that showed Canada unexpectedly lost 39,400 jobs in July. A Bloomberg survey projected a gain of 10,000.

Canadian retail sales fell 0.4 percent in June from a month earlier, economists in a Bloomberg survey forecast before data due Aug. 22. Sales climbed 1.9 percent in May, the fastest pace in three years.

The nation’s gross domestic product will grow 2.4 percent in 2014 after gaining 1.7 percent this year, according to the median forecasts in a Bloomberg survey of economists. The U.S. economy will expand 2.7 percent, after growing 1.6 percent in 2013, a separate survey forecast.

Economic Data

U.S. retail sales rose in July for a fourth consecutive month, gaining 0.2 percent after a 0.6 percent increase in June, the Commerce Department reported on Aug. 13.

New-home construction in America rose 5.9 percent to an 896,000 annualized rate from a revised 846,000 pace in June that was higher than previously reported, department data showed yesterday. A measure of employee output per hour increased at a 0.9 percent annualized rate, after a 1.7 percent decline in the first quarter, Labor Department data showed.

The Canadian currency’s losses were tempered by a European Union report Aug. 14 showing the 17-nation euro-area economy emerged from a record-long recession, rising 0.3 percent in the second quarter.

The data, which followed reports last week showing increases in Chinese imports, exports and industrial production, added to prospects for global economic growth and Canada’s commodity exports.

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