The Canadian dollar gained for the first time in five days versus its U.S. counterpart after American industrial production dropped in April by the most in eight months.
The currency advanced against the majority of its 16 most-traded peers as output at U.S. factories, mines and utilities fell a more-than-forecast 0.5 percent after a revised 0.3 percent gain in the prior month that was weaker than previously reported, a report from the Federal Reserve showed in Washington. Canada’s dollar fell to an almost three-week low earlier as the nation’s factory sales unexpectedly dropped for the third time in four months
The U.S. “dollar has softened a little bit across the board on the back of the weaker U.S. data,” David Bradley, director of foreign exchange trading at Bank of Nova Scotia (BNS)’s Scotia Capital unit, said by phone from Toronto. “We’re just in an adjustment process now where softness in the Canadian dollar is catching up to where the rest of the world is.”
The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, rose 0.2 percent to C$1.0157 per U.S. dollar at 5 p.m. after touching C$1.0219, weakest since April 25. One loonie buys 98.45 U.S. cents.
Canada’s 10-year benchmark bonds rose, with yields falling four basis points, or 0.04 percentage point, to 1.92 percent. The 1.5 percent note maturing in June 2023 gained 33 cents to C$96.20.
The Bank of Canada sold C$2.7 billion of three-year bonds at an average yield of 1.242 percent and a bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, of 2.71. The 1 percent securities mature in August 2016.
Futures of crude oil, Canada’s largest export, rose 0.2 percent to $94.42 per barrel in New York after touching their lowest point in almost two weeks. The Standard & Poor’s 500 Index of U.S. stocks added 0.5 percent.
The cost to insure against declines in the Canadian dollar versus its U.S. counterpart reached their highest point in more than eight months. The three-month so-called 25-delta risk reversal rate touched 1.6 percent, the highest since Sept. 6. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.
Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart reached 7.38 percent, the highest level since Feb. 27. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.
Canadian factory sales dropped 0.3 percent to C$49.5 billion ($48.4 billion), Statistics Canada said in Ottawa, following the revised February gain of 2.8 percent that was the biggest rise since July 2011. Economists forecast a 0.5 percent increase according to the median in a Bloomberg survey with 19 responses.
“We are becoming a little bit of a laggard,” said Don Mikolich, executive director of foreign exchange sales at Canadian Imperial Bank of Commerce in Toronto.
The loonie pared its decline as the U.S. Federal Reserve Bank of New York’s general economic index tumbled to minus 1.4 this month from 3.1 in April. Readings less than zero signal contraction in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey called for an increase to 4.
Canada’s factory sales “is maybe ignored to a certain degree in favor of some of the weakness that we saw in the Empire survey,” David Tulk, chief macro strategist at Toronto-Dominion Bank’s TD Securities unit, said by phone from Toronto. “That might suggest the Fed will be purchasing assets over a longer horizon and as a consequence the U.S. dollar weakens in that environment and Canada does get a bit of lift.”
The Fed’s quantitative easing program has seen it buying $85 billion of assets monthly since December in an attempt to drive down borrowing costs and stimulate the economy. That has a tendency to debase the currency.
“The U.S. economy is still dealing with some very heavy-duty fiscal tightening at this point,” Doug Porter, chief economist at the Bank of Montreal, said by phone from Toronto. “As the fiscal drag begins to become a little less important, we’ll see that underlying strength a little bit more clearly.”
The Canadian dollar has been the strongest performer in the developed world in the last month, gaining 3.3 percent against nine developed-world currencies tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar has gained 2.7 percent and the Australian dollar has fallen 2.6 percent.
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