Bloomberg News

Canada Dollar Gains First Time in Three Days Before Retail Sales

September 23, 2013

The Canadian dollar gained for the first time in three days before a report tomorrow forecast to show retail sales rebounded in July from the worst monthly decline this year.

Canada’s dollar approached the three-month high versus its U.S. peer reached last week as two Federal Reserve regional presidents said the economy still needs central-bank support. The currency remained higher after Canadian smartphone maker BlackBerry Ltd. reached a tentative buyout agreement. The nation’s retail sales increased 0.6 percent in July after declining the same amount the previous month, according to a Bloomberg survey of 18 economists.

“There may be some scope for an upside surprise on the data,” Mazen Issa, Canada macro-strategist at Toronto-Dominion Bank, said by phone from Toronto of the retail-sales report. “We could be in store for a stronger reaction in CAD.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, gained 0.2 percent to C$1.0284 per U.S. dollar at 5 p.m. in Toronto. It reached C$1.0182 per U.S. dollar Sept. 19, the highest since June. One loonie buys 97.24 U.S. cents.

Bonds, Oil

Canada’s benchmark 10-year government bonds rose, pushing yields down four basis points, or 0.04 percentage point, to 2.65 percent. The 1.5 percent security maturing in June 2023 gained 35 cents to cost C$90.28.

Futures on crude oil, Canada’s biggest export, fell 1.2 percent to $103.43 per barrel in New York and the Standard & Poor’s Index of U.S. stocks dropped 0.5 percent.

BlackBerry’s tentative $4.7 billion buyout deal from a group led by its biggest shareholder opens a path for the company to go private after a new line of smartphones failed to catch on. The loonie fell Sept. 20 when BlackBerry announced 4,500 job cuts.

Fed Bank of New York President William C. Dudley said that policy makers must “forcefully” push against economic headwinds as the U.S. has yet to show “any meaningful pickup” in momentum.

“The economy still needs the support of a very accommodative monetary policy,” Dudley, who is vice chairman of the Federal Open Market Committee and votes on monetary policy, said today in the text of remarks for a speech in New York.

Atlanta Fed President Dennis Lockhart, a backer of bond purchases who also spoke in New York, warned of slowing job creation. The central bank on Sept. 18 unexpectedly maintained the $85 billion in monthly asset purchases it uses to encourage growth and cap borrowing costs.

‘Repositioning’ Markets

“Within this brave new world, Canada probably does better until the Fed blinks,” Brad Schruder a director of foreign exchange at Bank of Montreal, said by phone from Toronto. “Despite retail sales being a decent number to watch for economic activity, I think the Canadian data isn’t really what you’re keying off of. You’re keying off a unified message from the Fed officials this week and a repositioning of global markets.”

Traders are trimming bets the Bank of Canada will raise interest rates next year, suggesting policy makers may follow their counterparts at the Fed in lowering growth forecasts as a slower U.S. expansion threatens to delay a long-awaited export boost.

Rate Expectations

The yield on March 2014 bankers’ acceptances contracts, a gauge of short-term interest rate expectations, fell to a four-month low of 1.28 percent. Fed Chairman Ben S. Bernanke cited worse-than-expected economic indicators for prompting officials last week to lower forecasts for the year and refrain from slowing monetary stimulus. Overnight index swaps shows traders are pricing in about six basis points in tightening by July, down from 20 the day before the Fed meeting.

Implied volatility for three-month options on Canada’s dollar versus its U.S. counterpart rose to 6.27 percent, from 6.13 percent last week, the lowest point in four months. The measure is used to set option prices and gauge the expected pace of currency swings. The average for this year is 6.8 percent.

“We’re probably looking for Canada to make a little bit more gains from here, and then lose a little bit of steam,” Don Mikolich, executive director of foreign exchange sales at Canadian Imperial bank of Commerce, said by phone from Toronto. “I don’t know if Canada is due to overly strengthen in a period where we’re still in recovery mode.”

Options traders became more bearish on the Canadian dollar for the second day. The three-month so-called 25 delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against its Canadian counterpart versus contracts to sell, rose to 1.27 percent, after touching 1.20 Sept. 19, the lowest in a closing basis since July.

The loonie has declined 3.3 percent in the past 12 months against nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index, making it the third worst performer. Only the Australian dollar’s 8.7 percent drop and the yen’s 22 percent decline have been greater. The U.S. dollar gained 2.2 percent.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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


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