Bloomberg News

Canadian Dollar Declines as CPI Rise Trails Forecast

July 20, 2012

Canada’s dollar fell the most in two weeks versus its U.S. counterpart as the nation’s annual inflation rate rose less than forecast in June, dimming the outlook for higher interest rates.

The currency declined against half of its major counterparts as futures on crude oil, the nation’s biggest export, dropped and stocks weakened. The consumer price index climbed 1.5 percent in June from a year ago, Statistics Canada said today in Ottawa, compared with a forecast for a 1.7 percent increase in a Bloomberg News survey of economists.

“Risk sentiment was already weak and this CPI data has put a damper on the Canadian-dollar bulls,” Steve Butler, managing director in Toronto at Scotiabank, said by e-mail. “The market was leaning on CPI coming in slightly higher than expectations.”

Canada’s currency, nicknamed the loonie, dropped 0.5 percent to C$1.0125 per U.S. dollar at 5 p.m. in Toronto. It reached the largest intraday decline since July 6. One Canadian dollar buys 98.77 U.S. cents.

The Standard & Poor’s 500 Index fell 1 percent while crude oil futures lost 1.3 percent to $91.44 a barrel in New York.

Technical Levels

After falling below its 200-day moving average, the loonie failed to break support levels at C$1.0050, according to a note to clients from analysts at Toronto-Dominion Bank (TD) in Toronto. If the dollar continues to strengthen against the loonie, it could post a bullish reversal. Near-term resistance is at C$1.0200.

“Moving through that seemed like it could be a signal that more downside in dollar-Canada was in the cards, but some of these bigger-picture risk issues are really driving the pair at the moment,” Greg Moore, a currency strategist at Toronto- Dominion bank in Toronto, said in a telephone interview. “The market started to look ahead and there’s a lack of clarity on where the steps are from here.”

Canada’s dollar recorded a second-straight weekly increase after crude oil rose yesterday to the highest since May. It’s up 2.4 percent this year, according to Bloomberg Correlation Weighted Indexes, which track 10 major currencies, on speculation the Federal Reserve will embark on another round of quantitative easing to spur growth.

Appeal Levels

“In an environment where people are betting on QE and the Canadian dollar isn’t too expensive, the appeal of the Canadian dollar as a safe haven or a bet on QE is going to rise,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York, said in a telephone interview.

Government bonds rose. Canada’s 10-year yield dropped four basis points, or 0.04 percentage point, to 1.61 percent, after decreasing on July 16 to 1.598 percent, the lowest yield since 1950, according to Bank of Canada and Bloomberg data. The 2.75 percent security maturing in June 2022 increased 42 cents at C$110.35.

The core inflation rate, which excludes eight volatile products, increased 2 percent after a May gain of 1.8 percent. Economists surveyed by Bloomberg forecast the June core rate would increase 2.3 percent.

On a monthly basis, both the total and core price indexes fell 0.4 percent in June. Economists surveyed by Bloomberg predicted consumer prices would fall of 0.2 percent in the month and the core index would decline 0.1 percent.

To contact the reporters on this story: Chris Fournier in Halifax at cfournier3@bloomberg.net; Lindsey Rupp in New York at lrupp2@bloomberg.net;

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


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