Canadian dollar declines as U.S. manufacturing index contracts

The Canadian dollar declined for a second day against its U.S. counterpart after manufacturing in the New York region contracted more than forecast, a sign the economy of Canada’s largest trade partner may be slowing.

The loonie, as the currency is known for the image of the waterfowl on the C$1 coin, slipped as Canadian existing home sales fell the most in more than two years in August as a market slump in Toronto deepened, a realtor group said. The currency earlier fell from almost a 13-month high as European Union finance ministers were deadlocked over efforts to quell the region’s sovereign-debt crisis. Canada’s inflation rate is expected to hold steady at 1.3 percent when the report is released on Sept. 21.

The New York data “just adds more fuel to the fire that there’s a general slowdown in the manufacturing sector and more broadly in the U.S. economy,” Mazen Issa, Canada macro strategist at the securities unit of Toronto-Dominion Bank in Toronto, said in a phone interview. “Stocks are in a bit of a decline today and the loonie is highly correlated with risk sentiment. Some of the negative sentiment is filtering through the market.”

The Canadian dollar declined 0.1 percent to 97.27 cents per U.S. dollar at 11:28 a.m. in Toronto. The currency has gained 5 percent this year. One Canadian dollar buys $1.0281.

Canadian bonds rose, with the yield on the 10-year benchmark falling two basis points, or 0.02 percentage point, to 1.95 percent. The 2.75 security rose C$0.17 to C$107.04.

The Standard & Poor’s 500 Index declined 0.2 percent.

Economic Indicators

The Federal Reserve Bank of New York’s general economic index dropped to minus 10.41, the lowest since April 2009, from minus 5.85 in August. The median forecast of 53 economists in a Bloomberg survey called for minus 2. Readings less than zero signal contraction in the so-called Empire State Index that covers New York, northern New Jersey and southern Connecticut.

The sale of homes fell 5.8 percent in August to 35,869, from 38,063 in July, the Canadian Real Estate Association said in a statement posted on its website. Home sales were down 8.9 percent from the same month last year. The average national price for existing homes rose 1.1 percent from July and 0.3 percent from a year earlier.

Bonds of Canadian banks, ranked the soundest for five straight years by the Geneva-based World Economic Forum, are the worst performers this year versus their global peers as slowing consumer lending cuts into profit growth.

The U.S. dollar-denominated debt of lenders including Royal Bank of Canada and Bank of Montreal has returned 4 percent, compared with an average increase of 12 percent for the Bank of America Merrill Lynch U.S. Corporates, Banks Index.

‘Violent Unwind’

Foreigners increased their holdings of Canadian securities in July, led by purchases of government bonds. The net purchase of C$6.67 billion ($6.87 billion) in July followed the revised net sale of C$7.76 billion in June, Statistics Canada said today in Ottawa. Bond investment by foreigners rose by C$6.10 billion, led by secondary market purchases of federal and provincial bonds.

The loonie is expected to trade in a range of 96.94 cents to 97.57 cents per U.S. dollar today, Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, wrote in a note to clients.

Traders hold a record net-long Canadian dollar position, highlighting “extreme Canadian dollar bullishness but it is also a warning that any shift in sentiment is likely to be met with a violent unwind,” Sutton wrote.

Bloomberg News

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