Canada Consumer Sentiment Dips to 8-Month Low on Currency

Consumer confidence in Canada fell to the lowest in eight months amid the worst start to a year since at least 1972 for the nation’s currency.

The Bloomberg Nanos Canadian Confidence Index declined to 56.6 in the week ending Jan. 31 from a previous reading of 57.6, the third straight drop to the lowest since the end of May. Consumers grew more pessimistic about their personal finances and the national economy, survey data show.

The Canadian dollar depreciated past C$1.12 versus the U.S. currency for the first time since July 2009 last month on speculation the Bank of Canada may favor lowering interest rates. The central bank cut its inflation forecast in January and reiterated a pickup in business investment and exports is taking longer than expected.

“Beyond a hit to the national psyche, a weaker currency can certainly dent confidence by making imported goods and international travel more expensive,” David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities, said in an e-mail.

The drop in consumer confidence may bolster the case for traders to increase bets the U.S. dollar will outperform its Canadian counterpart, Sebastien Galy, a senior foreign-exchange strategist in New York at Societe Generale SA, said in a note to clients.

Party Over

“The next leg to watch is housing data in Canada as the party now seems to be over,” Galy said. “The bubble had long supported consumer spending and that leg seems to be cut.”

The loonie, as the currency is called, lost 1.5 percent through last week from Jan. 22 when the central bank reduced its inflation forecast and cited the currency’s strength as a headwind to non-commodity exports. It traded 0.3 percent stronger to C$1.1099 against the greenback at 4:26 p.m. in Toronto.

In a Jan. 16 interview, Prime Minister Stephen Harper said critics focusing on a sliding currency as a sign of weakness in the nation’s economy are misinformed.

Harper, echoing recent comments by Bank of Canada Governor Stephen Poloz that tied currency movements to changes in the U.S. outlook, said the weakening of the Canadian dollar reflects upward pressures on the U.S. dollar, which he said has been undervalued.

The depreciation “really isn’t a drop in the value of the Canadian dollar,” Harper said. “What there is, as you know, is a rise globally in the value of the American dollar.”

While consistent trade deficits and debt-saddled consumers are ending Canada’s reign as the Group of Seven’s economic darling, companies that are primarily exporters have benefited.

Exporters Outperform

Publicly traded companies with more than 20 percent of their sales in the U.S. have outperformed, posting an average gain of 34 percent, weighted by market capitalization, since the loonie’s 2012 peak in September, according to data compiled by Bloomberg. That’s better than the 8.9 percent gain in the Standard & Poor’s/TSX Composite Index and the 19 percent rise in the Standard & Poor’s 500 Index over the same period.

The central bank’s efforts to “rebalance the economy,” along with factors such as elevated household debts, will probably act as a “drag on growth,” said Joseph Brusuelas, Senior Economist at Bloomberg LP in New York. The ratio of Canadian household debt to disposable income rose to a record in the third quarter as consumers increased their mortgage borrowing, Statistics Canada reported in December.

Household Debt

Toronto-Dominion Bank Chief Executive Officer Ed Clark said Jan. 27 that Canada’s economy is in danger of underperforming the U.S. as consumers become increasingly “fragile” amid rising household debt and home prices.

Consumer confidence is slipping even as economic data point to a rebound. The nation’s gross domestic output expanded for a fifth straight month in November as oil and gas production rebounded, Statistics Canada reported Jan. 31.

On Feb. 7, the statistics agency will report employment figures for January. Economists surveyed as of Jan. 31 forecast 20,000 jobs were created in the month, which would lower the unemployment rate 1/10th of a percentage point to 7.1 percent.

“The declines in consumer confidence were largely fueled by Eastern Canada, as sentiment has remained steady in the Prairies and British Columbia,” said Nik Nanos, chairman of Ottawa-based polling firm Nanos Research Group.

Confidence in Ontario dropped to 55.9 last week while Quebec’s fell to 53.6, the lowest reading since May.

Personal Finances

Bloomberg Nanos’s confidence index has two sub-indexes: the Pocketbook Index, based on survey responses to questions about personal finances and job security, and the Expectations Index, based on surveys about the outlook for the economy and real-estate prices.

The Pocketbook Index declined last week to 58.9 from 59.1 and the Expectations Index dropped to 54.4 from 56.2, the data show.

The share of Canadians who say they’re better off financially over the last year fell to 18.6 from 19.6 percent the previous week. Those who say the Canadian economy will improve in the next six months decreased to 19.9 percent from 22.5 percent.

Canadian Finance Minister Jim Flaherty could abandon his plan to eliminate the country’s budget deficit in 2015 if economic growth remains sluggish, the International Monetary Fund said in a report today.

The proportion of respondents who think real-estate values in their neighborhood will rise over the next six months grew to 38.1 percent from 37.9 percent, just as those who see prices falling increased to 12.3 percent from 11.6 percent.

The Nanos data are based on phone interviews with 1,000 people, using a four-week rolling average of 250 respondents. The results are accurate within 3.1 percentage points.

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