Bloomberg News

Canadian Dollar Falls as Report Shows Economy Contracted in May

July 29, 2011

July 29 (Bloomberg) -- Canada’s dollar declined against its U.S. counterpart after a report showed the nation’s economy unexpectedly contracted in May by the most in two years as production in the mining and oil and gas sector declined.

The Canadian currency fell versus all of its 16 most-traded counterparts as a report showed the U.S. economy grew less than forecast in the second quarter, after almost coming to a halt at the start of the year, as consumers retrenched. Crude oil, Canada’s largest export, declined.

“The fact that Canada and U.S. GDP weren’t great just took a toll on the Canadian dollar,” said Brian Kim, a currency strategist in Stamford, Connecticut, at Royal Bank of Scotland Group Plc. “Disappointing GDPs in North America in general are not helping the currency.”

The Canadian currency weakened 0.6 percent to 95.52 cents per U.S. dollar by 5 p.m. in Toronto, compared with 94.93 yesterday. It gained 0.9 percent in July, from 96.34 cents on June 30, and touched 94.07 cents on July 26, the strongest since Nov. 9, 2007. One Canadian dollar buys $1.0469.

Crude oil futures slipped 1.5 percent to $95.95 a barrel. The MSCI World Index of equities in developed countries fell 0.5 percent, while Canada’s benchmark Standard & Poor’s/TSX Composite Index dropped 0.8 percent.

Economic Data

Yields on two-year Government of Canada bonds fell nine basis points to 1.39 percent, pushing the price of the 2 percent note due in August 2013 up 17 cents to C$101.20. The yield on the 10-year note fell 10 basis points to 2.78 percent.

Canada’s economic output fell 0.3 percent in May to C$1.26 trillion ($1.32 trillion) on a seasonally adjusted basis, after being little changed in April and gaining 0.3 percent in March, Statistics Canada said today in Ottawa. Economists in a Bloomberg survey forecast the economy would grow 0.1 percent, based on the median of 24 responses.

The Canadian GDP report gives more evidence that the second quarter “will be a very subdued print,” Mazen Issa, macro strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto, wrote in a note to clients. The report also increases the risk that growth in the quarter ended June 30 will fall short of TD’s 1.3 percent forecast, he said.

Materials Prices

A separate Statistics Canada report showed that factory prices and raw materials costs fell faster than economists predicted last month. The industrial product price index fell 0.3 percent in June from May, led by petroleum and coal products as gasoline prices dropped 4.3 percent, Statistics Canada said. The median estimate in a Bloomberg survey of 15 economists was for a 0.1 percent decline.

U.S. gross domestic product rose at a 1.3 percent annual rate following a 0.4 percent gain in the prior quarter that was less than previously estimated, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase.

Canada’s currency weakened earlier as an impasse between President Barack Obama and House Speaker John Boehner spurred some investors to predict the U.S. will lose its AAA credit rating. Moody’s Investors Service said it may cut Spain’s credit ranking.

“This is all about the U.S. dollar and the euro,” said Firas Askari, head currency trader at Bank of Montreal’s BMO Capital unit, by e-mail from Toronto. “The market is focused on the U.S. deficit crises. This continuing political brinksmanship is causing great unease in all asset classes. This is not a Canadian dollar story at all.”

Canada’s dollar has declined 3.3 percent this year versus the currencies of nine other developed nations in the second- worst performance, according to Bloomberg Correlation-Weighted Currency Indexes. The greenback has fallen 7.9 percent and the Japanese yen has lost 2.1 percent of its value.

--Editor: Paul Cox, Greg Storey

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net; Chris Fournier in Toronto at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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