Bloomberg News

Canada Dollar Drops Versus U.S. Peer After Fed Lowers Forecast

June 20, 2012

Canada’s dollar fell against its U.S. peer after the Federal Reserve cut its estimates for 2012 growth and said it foresees little progress on unemployment this year, damping demand for assets linked to growth.

The currency briefly gained after comments from German Chancellor Angela Merkel increased optimism that policy makers will resolve the European crisis. The Fed said it would continue its stimulus program known as Operation Twist through the end of 2012, disappointing investors betting it would engage in a third round of asset purchases known as quantitative easing.

“An extension of Operation Twist to the market was a foregone conclusion and the selloff in the dollar in the last week or so was pricing that in,” said Dean Popplewell, an analyst in Toronto at the online currency-trading firm Oanda Corp. “The Canadian dollar will go hand-in-hand with risk on- risk off.”

Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, fell 0.1 percent to C$1.0183 per U.S. dollar at 5 p.m. in Toronto, after falling as low as C$1.0232. It earlier strengthened to C$1.0160, the strongest since May 22. One Canadian dollar buys 98.20 cents.

Canadian 10-year bonds fell, pushing the yield up two basis points, or 0.03 percentage point, to 1.78 percent. The yield touched 1.615 percent on June 1, the lowest since 1950, according to Bloomberg and Bank of Canada data. The price of the 2.75 percent bonds due in June 2022 dropped 25 cents to C$108.78.

The Standard & Poor’s 500 Index fell 0.2 percent and crude oil for July delivery declined 2.7 percent to $81.75 a barrel after falling as much as 3.7 percent.

Merkel’s View

Merkel declined to commit to direct sovereign-debt purchases through the European Financial Stability Facility, pushing back on calls by euro-region leaders who backed the measure as a way to ease the crisis.

“There is no concrete planning that I know about, but there is the possibility of purchasing sovereign bonds on the secondary market,” Merkel told reporters today in Berlin after talks with Dutch Prime Minister Mark Rutte. “But this is a purely theoretical statement about the legal situation.”

The Fed will extend Operation Twist, a $400 billion program announced in September and set to expire this month, by $267 billion through the end of the year in a bid to reduce unemployment and protect the expansion. The program replaces short-term government debt with the same amount of longer-term Treasuries.

‘Additional Steps’

“If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” Fed Chairman Ben S. Bernanke said at a news conference after the meeting. He said those steps might include additional asset purchases.

Fed policy makers lowered their central tendency estimate for U.S. 2012 gross domestic product growth to 1.9 percent to 2.4 percent from 2.4 percent to 2.9 percent in April. Estimates for 2013 centered around 2.2 percent to 2.8 percent, compared with 2.7 percent to 3.1 percent in the previous forecast. The U.S. is Canada’s largest trading partner.

Fifty-eight percent of respondents in a June 18 poll said the Fed would prolong the program, according to a Bloomberg News survey of economists. Sixty percent of respondents in the survey said the Fed probably wouldn’t start a third round of quantitative easing.

“It was a little disappointing,” said Blake Jespersen, managing director of foreign exchange institutional sales in Toronto at Bank of Montreal. (BMO) “The market was hoping that Operation Twist may continue past the end of the year. There were a few participants that thought maybe there would be some hint of QE.”

Economic Indicators

The loonie weakened against the majority of its most-traded peers as Statistics Canada is forecast to report this week that retail sales and inflation are slowing, keeping a lid on the prospects for interest-rate increases.

Canadian retail sales may have risen 0.2 percent in April, after increasing 0.4 percent the previous month, according to the median estimate of 22 economists in a Bloomberg News survey before the report tomorrow. Consumer prices expanded 0.1 percent in May from 0.4 percent growth in April, a separate survey of 23 economists showed. Statistics Canada will release the inflation report June 22.

The Bank of Canada has kept rates at 1 percent since September 2010. Central bank policy makers said at their June 5 meeting that they may raise interest rates as the domestic economic recovery proceeds as forecast.

The Canadian dollar dropped 0.7 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, while the greenback fell 0.6 percent and the euro and Swiss franc each weakened 1.7 percent, the biggest decline.

To contact the reporter on this story: Catarina Saraiva in Washington at asaraiva5@bloomberg.net

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


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