Bloomberg News

Canada Dollar Declines for a 3rd Week as Economic Growth Stalls

March 24, 2012

Canada’s dollar depreciated for the third straight week, the longest string of losses since August, as a rally in higher-risk assets faded, stoking demand for havens such as the yen, U.S. dollar and Swiss franc.

The currency touched the lowest level this month yesterday, reflecting diminished confidence in the nation’s economy after reports during the week on retail sales and consumer prices trailed median forecasts. Futures trading shows a reduced likelihood of interest-rate increases. Canadian Finance Minister Jim Flaherty will present the government’s budget on March 29.

“The Canadian dollar has been underperforming against its major counterparts,” said David Song, a currency analyst in New York at DailyFX.com, the research unit of FXCM Inc. (FXCM), an online currency-trading service. “It seems like the Bank of Canada will be on hold for a prolonged period.”

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, fell 0.6 percent on the week to 99.78 cents against the U.S. dollar yesterday in Toronto. One Canadian dollar purchases $1.0022.

The Standard & Poor’s 500 Index fell 0.5 percent this week, it’s first decline since the five days ended Feb. 10. The MSCI World Index lost 1 percent. Equities are the primary driver of the Canadian dollar’s performance, according to data compiled by Bloomberg.

The correlation coefficient between the loonie and the S&P 500 was 0.75 yesterday, versus 0.51 for oil, 0.61 for copper and 0.46 for the U.S.-Canada two-year yield spread, 30-day correlation data show. A coefficient of 1 means the measures move in lockstep.

Third Worst

The loonie dropped 0.7 percent over the past week, the third-worst performer after losses of 1.3 percent by the Australian dollar and 0.9 percent by its New Zealand counterpart, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The yen and franc topped the index. (SPX)

Canada’s currency touched C$1.0034 yesterday versus the greenback, the least since it reached C$1.0050 on Feb. 17.

“Canada has got a very good chance of trading beyond its current range, certainly to the weaker side,” said Dean Popplewell, head analyst in Toronto at the online currency- trading firm Oanda Corp. “Longer-term players are certainly very comfortable being short Canada.” A short position is a bet the currency will weaken.

Popplewell estimates fair value for the currency is about five cents weaker. Average forecasts in a Bloomberg survey tell a different story. The loonie will strengthen to 98 cents versus the U.S. dollar by the end of 2012, according to the median of 37 economists’ and analysts’ projections.

‘Fade the Rally’

“We think the U.S. dollar remains range-bound for now versus the Canadian dollar,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD)’s TD Securities unit, wrote in a note to clients yesterday. “A clear push through C$1.0050 is needed to confirm a breakout -- and that likely means something in excess of C$1.0075-80 on a sustained basis. For now, fade the rally.”

Government bonds climbed, pushing the yield on the benchmark 10-year note lower by six basis points, or 0.06 percentage point, to 2.18 percent. The yield reached 2.297 percent on March 19, the highest since October.

Yields on Canada’s two-year note dropped four basis points to 1.24 percent, as traders speculated the central bank was moving further from raising rates.

Core Inflation

Canada’s consumer price index rose 2.6 percent in February from a year earlier, following January’s 2.5 percent gain, Statistics Canada said yesterday. The core rate, which excludes eight volatile items, rose 2.3 percent, the fastest since December 2008. Economists surveyed by Bloomberg predicted the total rate would quicken to 2.7 percent and core inflation would be 2.2 percent, according to the median of 25 estimates.

Retail sales in Canada expanded 0.5 percent in January, as the biggest jump in new car sales in three years was blunted by declines at home-improvement and electronics stores, Statistics Canada said March 22 in Ottawa. That was less than the 1.8 percent median projection of 24 forecasts compiled by Bloomberg.

The Bank of Canada has held its target lending rate at 1 percent since September 2010 in the longest pause since the 1950s. Borrowing costs aren’t forecast to advance until the first quarter of 2013, according to economists in a Bloomberg News survey.

Trimming Expectations

The yield on the September 2012 bankers’ acceptances contract, a barometer of short-term rate projections, dropped one basis point to 1.31 percent today, from 1.37 on March 15, which was the highest level since August. The decreasing yield indicates traders are trimming expectations for policy makers to raise rates.

“With the budget next week and with potential other measures looming, and already trying to see the impact of tightening elsewhere in terms of lending, they want to see how that plays out,” Mark Chandler, head of fixed-income and currency strategy at Royal Bank of Canada’s RBC Capital Markets unit in Toronto, said yesterday.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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


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