Canadian Dollar Gains as Factory Sales Climb to Five-Month High

The Canadian dollar gained to a more than six-week high as factory sales rose at the fastest pace in five months in July, adding to signs economic growth is picking up.

The currency advanced a second day versus its U.S. peer as the cost of living in America rose less than forecast in August, a sign it will take time for inflation to reach the U.S. Federal Reserve’s goal. The Federal Open Market Committee completes a two-day meeting tomorrow after which policy makers will announce whether they will slow monthly asset purchases, which are aimed to stimulate the economy and may also devalue the U.S. currency.

“Stronger-than-expected Canadian manufacturing sales, combined with some weaker U.S. data, has pushed the U.S. dollar down a little bit,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank. The sales number “does enhance the outlook for July gross domestic product to some degree -- obviously, a much better-than-expected result.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, gained 0.3 percent to C$1.0296 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0275 per U.S. dollar, the highest since Aug. 1. One loonie buys 97.13 U.S. cents.

Canada’s benchmark 10-year government bonds rose, pushing yields down one basis point, or 0.01 percentage point, at 2.77 percent. The 1.4 percent security maturing in June 2023 added 7 cents to cost C$89.28.

Futures on crude oil, Canada’s biggest export, fell 1 percent to $105.52 per barrel in New York after touching its lowest point in two weeks. The Standard & Poor’s 500 Index of U.S. stocks gained 0.4 percent.

Loonie Gains

The Canadian dollar may be due for further gains tomorrow even if the Fed says it will reduce asset purchases by as much as $10 billion per month, as long as the central bank accompanies the move with a statement stressing a longer time frame before interest rates rise, Adam Cole, head of Group of 10 currency strategy at Royal Bank of Canada, said.

“Ten billion initial tapering seems to be comprehensively expected and so in itself should have little impact, but we are if anything concerned the commentary that goes with it, at the press conference in particular, may talk down the significance of the tapering,” he said by phone from London. “The more aggressive the language to do that the more negative for the dollar. That would include dollar/Canada, I suspect.”

Economists predict a $5 billion reduction in the Fed’s monthly $85 billion in asset purchases, according to a Bloomberg survey with 63 responses.

Factory Sales

Factory sales climbed 1.7 percent to C$49.5 billion ($48 billion), Statistics Canada reported from Ottawa, with the total boosted by upward revisions to the prior two months. The gain exceeded all 18 economist forecasts in a Bloomberg survey with a median of 0.5 percent.

The U.S. dollar fell versus all but three of its 16 most-traded peers as the consumer-price index increased 0.1 percent, the least in three months, after a 0.2 percent gain in July, Labor Department figures showed in Washington. The median forecast in a Bloomberg survey of economists called for a 0.2 percent gain.

Fed policy makers, who have set a 2 percent inflation target, have said they are watching prices to ensure the U.S. doesn’t slip into a prolonged period of disinflation that threatens the expansion.

‘Small Tapering’

“A little softer than expected, so in theory that would strengthen the Canadian dollar relative to the U.S. dollar,” said Robert Kavcic, senior economist at Bank of Montreal, by phone from Toronto. “Inflation is still very benign and well behaved, so I don’t think the Fed is going to read too much into this one release. We’re expecting a small tapering announcement tomorrow.”

The loonie touched a one-month high against the greenback yesterday after former U.S. Treasury Secretary Larry Summers’s withdrawal from the race to head the Fed boosted bets for slower tapering. Fed Vice Chairman Janet Yellen, who has helped create the central bank’s stimulative policies in recent years, is President Barack Obama’s top candidate to lead the central bank, according to people familiar with the process.

Implied volatility for three-month options on Canada’s dollar versus its U.S. counterpart fell to 6.7 percent, near the 6.6 percent level reached Sept. 11 that was the lowest point in four months. The average for this year is 6.8 percent. The measure is used to set option prices and gauge the expected pace of currency swings.

The Canadian dollar has dropped 2.8 percent in the last year against nine developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. That’s the third worst performance in the index, behind only the Australian dollar’s 8.6 percent decline and the yen’s 20 percent drop. The U.S. dollar added 3.4 percent.

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