Canada’s dollar dropped against its U.S. counterpart by the most in six months as a drop in retail sales and a third tightening of mortgage terms increased bets the Bank of Canada may delay further rate increases.
The Canadian currency also declined after economic reports in the U.S. were weaker than expected and a measure of China’s manufacturing probably shrank for an eighth month. BOC Governor Mark Carney, speaking today in Halifax, Nova Scotia, reiterated that he may raise interest rates as the economy continues to move toward full output.
“You look long-term at the global economy in general, and the outlook is pretty bleak,” John Doyle, director of markets in Washington at currency-trading firm Tempus Consulting Inc., said in a telephone interview. “I think investors are nervous. There isn’t a really good reason to buy some of the higher- yielding currencies, and what you see is that investors are buying the U.S. dollar as a safe.”
Canada’s currency, nicknamed the loonie for the image of the water bird on the C$1 coin, fell 1.12 percent to C$1.0297 at 5 p.m. in New York, the biggest drop since Dec. 12. One Canadian dollar buys 97.12 U.S. cents.
Canadian 10-year bonds rose, pushing the yield down three basis points, or 0.03 percentage point, to 1.75 percent. The yield touched 1.615 percent on June 1, the lowest since 1950, according to Bloomberg and Bank of Canada data.
“To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate,” Carney said according to the text of his remarks to the Atlantic Institute for Market Studies.
The world’s 10th largest economy grew at a 1.9 percent annualized pace in the first quarter as the country’s ratio of household debt to disposable income rose to a record. Carney has held his policy rate at 1 percent since September 2010 in the longest pause since the 1950s.
Retail sales in April decreased 0.5 percent to C$38.9 billion ($38.1 billion), after a 0.4 percent gain in the previous month, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News forecast 0.2 percent growth, based on the median of 22 projections.
Canadian Finance Minister Jim Flaherty said he will tighten mortgage terms as the Group of Seven country with the soundest government finances tries to avert a household debt crisis.
The government will shorten the maximum amortization period on mortgages the government insures to 25 years from 30 years, and lower the maximum amount homeowners can borrow against the value of their homes to 80 percent from 85 percent, Flaherty said in a statement delivered in Ottawa. Flaherty has already reduced the amortization limits twice since 2008.
“The combination of weaker retail sales and the shift in mortgage regulation in Canada announced today are likely to take some of the pressure off the BOC,” said Camilla Sutton, a Bank of Nova Scotia (BNS) currency strategist in Toronto. “The Canadian dollar has gone back to earlier levels.”
The Federal Reserve Bank of Philadelphia’s general economic index fell to minus 16.6 in June, the lowest level since August, from minus 5.8 the previous month. Economists forecast the gauge would improve to zero, the dividing line between growth and contraction, according to the median estimate in a Bloomberg News survey. The report covers eastern Pennsylvania, southern New Jersey and Delaware.
Jobless claims decreased by 2,000 to 387,000 in the week ended June 16, Labor Department figures showed today in Washington. The median forecast of 45 economists surveyed by Bloomberg News called for 383,000. The four-week average, a less volatile measure, climbed to the highest of the year.
A report showed manufacturing in China may shrink for an eighth month in June, damping demand for the currencies of commodity exporting countries. A preliminary reading today for a Chinese purchasing managers’ index was 48.1 for June from HSBC Holdings Plc and Markit Economics. Above-50 readings indicate expansion.
The U.S. dollar rose against all of its major counterparts as investors sought greenback’s safety. The Canadian dollar rose against 10 of its 16 major counterparts.
The Standard & Poor’s 500 Index (SPX) fell 2.2 percent and the Thomson Reuters/Jefferies CRB Index (CRY) of raw materials dropped 2.1 percent. Crude oil, Canada’s largest export, fell 4.7 percent to $77.97 a barrel in New York.
The currency fell yesterday after the Fed fulfilled analysts’ expectations by extending a measure of monetary stimulus yesterday.
“The Fed did exactly what the market was expecting,” Steven Saywell, head of currency strategy for Europe at BNP Paribas SA in London, said in a telephone interview. “There’s already been a significant risk rally in the past two weeks, and we’re taking a breather. We will continue to see a risk rally and dollar weakness on expectations of further easing. We see the Canadian dollar moving back down towards parity.”
The loonie last traded on a one-to-one basis with its U.S. peer on May 15, when it reached 99.90 Canadian cents per U.S. dollar. The Canadian dollar appreciated 23 percent from December 2008 through June 2011, when the Fed bought $2.3 trillion of assets in two rounds of stimulus known as quantitative easing.