Canadian Dollar Falls 2nd Day on Record Household-Debt Growth

The Canadian dollar fell for a second day as the ratio of Canadian household debt to disposable income rose to a record in the second quarter, signaling consumers may struggle to lead the economic recovery.

The currency pared the decline versus its U.S. peer after retail sales in the U.S. rose less than forecast as investors weighed whether the U.S. central bank will begin to taper its $85 billion-per-month bond purchases at its next meeting Sept. 17-18. Canada’s dollar fell a second day versus that of fellow commodities exporter New Zealand after the South Pacific nation’s central bank said yesterday that interest-rate increases were on tap for next year. Oil dropped.

“The household debt number shows you can’t expect the Canadian consumer to contribute much to Canadian growth, and reflects the troubles the Canadian economy still faces, which is not a positive for the currency,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Any strength in the Canadian dollar has to be discounted, as the bias is still to the downside as the U.S dollar gains strength with a better economic performance and expected tapering from the Fed.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.3 percent to C$1.0351 per U.S. dollar at 5 p.m. in Toronto. One loonie buys 96.61 U.S. cents.

Bonds, Oil

Canada’s benchmark 10-year government bonds rose, with yields falling two basis points, or 0.02 percentage point, to 2.76 percent. The 1.5 percent security maturing in June 2023 added 9 cents to C$89.27.

Futures on crude oil, Canada’s largest export, were little changed at $108.58 per barrel in New York and the Standard & Poor’s 500 Index of U.S. stocks rose 0.3 percent.

The loonie’s drop pared a second weekly gain, part of a retracement that may take it to C$1.0250, where it will meet resistance, George Davis, chief technical analyst for fixed-income and currency strategy in Toronto at Royal Bank of Canada, said in a note to clients. That level will present a buying opportunity for the U.S. dollar as valuations approach “oversold levels,” he said, opening to way to the C$1.0378-to-C$1.0442 area, with a close above C$1.0551 suggesting a continuation of greenback strength.

“Prices will have to register a daily close below the trend-line dating back to last September at C$1.0198 in order to nullify the current uptrend” in the greenback against the loonie, Davis said.

Loonie Stalls

Credit-market debt such as mortgages rose to 163.4 percent of disposable income, compared with a revised 162.1 percent in the prior three-month period, Statistics Canada said today in Ottawa. Mortgage borrowing rose 1.7 percent to C$1.11 trillion ($1.08 trillion).

Canadian Finance Minister Jim Flaherty has tightened mortgage rules four times amid signs of overbuilding in markets such as Toronto and Vancouver. Bank of Canada Governor Stephen Poloz has warned that elevated household debt represents the biggest domestic threat to the world’s 11th-largest economy.

The growth in household credit market debt rose to 1.6 percent in the April-June period from 0.5 percent in the previous quarter, Statistics Canada said. The rise in the debt-income ratio follows two quarters where it declined.

“We’ve seen the Canadian dollar soar over the last five sessions, soar then stall -- and the stall leads me to believe we’re a little bit too close to the sun and we’ll start to fall,” said Brad Schruder, a director of foreign exchange at Bank of Montreal, by phone from Toronto. “The degree to which that happens depends on the degree to which the Fed tapers.”

Fed Watching

The 0.2 percent increase in U.S. retail sales was the smallest in four months and followed a revised 0.4 percent July gain that was bigger than previously estimated, the Commerce Department reported. The median forecast of economists surveyed by Bloomberg called for a 0.5 percent advance. Sales excluding motor vehicles rose 0.1 percent.

The Federal Open Market Committee will decide to reduce monthly purchases of Treasuries to $35 billion from $45 billion, according to the median of 34 responses in a Bloomberg survey of economists. Policy makers will maintain mortgage-bond buying at $40 billion, the survey shows.

“It certainly seems like markets in general are tied up in knots right now over what the Federal Reserve is going to say next week,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc.

Kiwi Soars

The New Zealand dollar, known as the kiwi, climbed for a sixth day after central bank Governor Graeme Wheeler said yesterday he would probably raise interest rates next year, putting it in line to be the first developed nations to start raising borrowing rates.

Bank of Canada’s Poloz last week kept his main interest rate unchanged and reiterated that current monetary policy remains appropriate, as an expected rotation of demand to exports and investment is being delayed, suggesting a pause in higher rates through 2014.

The loonie has fallen 0.6 percent in the past month against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The kiwi gained 1.8 percent, trailing only the pound’s 2.5 percent rise. The U.S. dollar fell 0.6 percent.

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