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TORONTO, Oct 22: The Canadian dollar fell sharply on Friday, taking a triple hit from middling retail sales data, an early slump in oil prices and a broadly stronger US dollar.
Domestic bond prices strengthened for the second straight day as the retail sales weakness prompted buying after several weeks of declines.
The currency finished C$1.1882 to the US dollar, or 84.16 US cents, down from C$1.1780 to the US dollar, or 84.89 US cents, at Thursday’s close.
Retail sales dipped a sharper than expected 0.3 per cent in August on a drop in vehicle sales, Statistics Canada said. Excluding autos, sales rose 0.2 per cent, but that fell far short of the 0.5 per cent gain that Bay Street analysts had expected.
The currency had already weakened ahead of the data, but the pace of the selloff picked up after the release. Other factors also contributed to the loonie’s weakness, sending it to its third-straight weekly loss after five consecutive months of gains.
Oil was off a little bit and the US dollar’s stronger across the board, and there may be a little bit of a hangover from paring back the growth forecasts for Canada in the Monetary Policy Report, said Ted Gould, a trader at Investors Bank & Trust in Boston.
In its semi-annual report on Thursday, the Bank of Canada lowered its 2006 economic growth outlook to 2.9pc from 3.3pc, even as it suggested it would continue hiking interest rates.
A Reuters poll taken after the report showed Canada’s primary dealers expect two or three more rate increases before the end of the first quarter of 2006, but that hasn’t helped the currency over the last two sessions.
Conventional wisdom would tell you to look for (the US dollar versus Canada) a little lower than it is right now, but we’ve been talking about rates for a while, so a lot of that is priced in, said Gould.
However, the economy’s strength and the rate outlook have supplanted energy prices as the currency’s main drivers in recent weeks, putting the focus on next week’s economic calendar.
The big release will be September’s consumer price data on Tuesday, while producer prices and raw materials prices will follow on Friday.
BONDS CLIMB: Government debt prices gained ground on the retail sales report, but, with a technically driven rally boosting US treasuries sharply, US-Canada yield spreads narrowed.
Gains were capped partly because the August retail figures were only the fourth monthly drop in 20 months, while the Bank of Canada’s rate hike this week and subsequent comments have cemented expectations of continued monetary tightening.
Rate hikes generally drive bond prices lower, as their fixed payments look less attractive when compared with higher yields on short-term investments.
It was the second straight day of price gains, but that followed about seven weeks of declines as the Bank of Canada sounded a more hawkish tone.
In addition to next week’s data, Bank of Canada Governor David Dodge and Deputy Governor Paul Jenkins will appear before a Senate banking committee on Wednesday to talk about the Monetary Policy Report.—Reuters
