Canada Dollar Loses Most in Week Since June as CPI Trails Target

Canada’s dollar had the biggest weekly loss in more than two months as the consumer price index rose less than the central bank’s inflation target for a 15th month, adding to evidence economic growth is slowing.

The currency, called the loonie for the image of the bird on the C$1 coin, erased a decline to a six-week low today versus the U.S. dollar after American new-home sales slid more than forecast. The loonie sank against most major peers amid bets the Federal Reserve will slow stimulus. Canadian retail sales dropped in June, a report showed yesterday, and data on Aug. 30 may say growth in gross domestic product slowed.

“The lower Canadian dollar is a reflection of the theme we’ve seen throughout the week, which is weaker data across the board,” David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit, said by phone from Toronto. “We’re looking ahead to GDP data next week and keeping an eye on what comes out of the Fed in terms of tapering.”

Canada’s currency rose 0.2 percent to C$1.0496 per U.S. dollar at 5 p.m. in Toronto, after depreciating earlier as much as 0.5 percent to C$1.0568, the weakest since July 9. It lost 1.5 percent this week, the most since the five days ended June 21. One Canadian dollar buys 95.27 U.S. cents.

Futures traders increased for the first time in six weeks their bets the Canadian dollar will fall against its U.S. peer, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the loonie versus those on a gain -- so-called net shorts -- was 9,544 on Aug. 20, compared with net shorts of 9,081 a week earlier.

Bonds Gain

Canadian government bonds rose for a second day, pushing the yield on the benchmark 10-year security down five basis points, or 0.05 percentage point, to 2.69 percent. It touched a two-year high of 2.78 percent yesterday. The price of the 1.5 percent debt due in June 2023 added 41 cents to C$89.85.

The nation’s consumer prices increased 1.3 percent in July from a year earlier, less than the 1.4 percent gain forecast in a Bloomberg survey. The CPI rose 1.2 percent the previous month. The central bank’s inflation target is 2 percent. The price report followed declines in Canadian wholesale and manufacturing sales in June and a surprise loss of jobs last month.

“July’s subdued inflation figures are consistent with an economy growing below potential, which will only reinforce the Bank of Canada’s reluctance to raise rates anytime soon,” David Madani, an economist at Capital Economics Ltd., wrote in a note to clients.

The central bank has kept its benchmark interest-rate target at 1 percent since September 2010 to support the economy.

GDP Report

Canada’s economic output contracted 0.4 percent in June, helping to pare second-quarter growth to an annualized 1.5 percent, economists in a Bloomberg survey projected before the data. The economy expanded 2.5 percent in the first quarter.

The loonie erased today’s losses after U.S. Commerce Department data showed sales of newly built U.S. homes declined 13.4 percent last month to a 394,000 annualized pace, the weakest since October, following a 455,000 rate in the prior period that was lower than previously estimated. The median estimate in a Bloomberg survey for July was for a decrease to 487,000. The decline was the biggest since May 2010.

Oil, Canada’s biggest export, climbed amid speculation the Fed will defer plans to slow monetary stimulus. Futures rose 1.2 percent to $106.31 a barrel in New York.

Fed Tapering

The loonie slid on Aug. 21 after minutes of the U.S. central bank’s last meeting showed most policy makers were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to start reducing its $85 billion in monthly bond buying under quantitative easing this year if the economy improves.

The Fed’s asset purchases, which have fueled growth in riskier assets, have raised concern they’ll lead to inflation and debase the U.S. dollar. Investors are betting slower bond buying will cause the greenback to strengthen against its Canadian peer.

Options traders were the most bearish on the Canadian dollar in almost eight weeks. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against its Canadian counterpart versus contracts to sell, rose to 1.64 percent, the highest level on a closing basis since July 2. The 2013 average is 1.24 percent.

Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart increased to 7.8 percent, the highest since July 16. Implied volatility is used to set option prices and gauge the expected pace of currency swings. The average for this year is 6.8 percent.

The loonie fell 1.7 percent in the past month against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. Australia’s dollar lost 2.7 percent and the New Zealand dollar dropped 2.2 percent, while the U.S. dollar gained 0.6 percent.

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