August 22, 2012 / 9:18 PM / in 5 years

Canadian dollar weakens on retail data, oversold market

TORONTO (Reuters) - The Canadian dollar continued its retreat on Wednesday from the 3-1/2 month highs of the previous session, at one point hitting its weakest level in more than a week against the U.S. currency after the government reported an unexpected drop in retail sales.

The decline in June sales confirmed a weaker trend in consumer spending that will likely trim overall growth in the second quarter and raises questions about the Bank of Canada’s hawkish slant on monetary policy.

“The market’s been heavily oversold over the last few weeks in particular, so seeing a corrective bounce isn’t really untoward. The charts were suggesting we’re going to see a short term bounce,” said Gareth Sylvester, director at Klarity FX.

He noted that retail sales data was the latest in a string of key economic indicators all pointing toward a softening Canadian economic outlook.

“I think moving forward, if the economic indicators continue to show signs of weakening economic outlook, I think the Bank of Canada could certainly shift into a more neutral stance. That might just take the edge off some of the CAD’s appeal,” said Sylvester.

Doubts about Europe’s progress on its debt crisis and weak export data from Japan also underscored the problems facing the global economy.

The Canadian dollar closed at C$0.9914 versus the U.S. dollar, or $1.0087, weaker than Tuesday’s North American session close at C$0.9897, or $1.0104. After the retail sales data, it drifted as low as C$0.9948, or $1.0052, its softest level since August 10.

“We’re running out of positive steam and the next wave of support to redefine the market,” said David Tulk, chief Canada macro strategist at TD Securities.

The Canadian currency did ease away from session lows after minutes from the U.S. Federal Reserve’s August meeting suggested another round of monetary stimulus could be imminent unless the economy improved considerably.

While the meeting was held before a recent improvement in U.S. economic data, policymakers appeared firm in their dissatisfaction with the current outlook.

Bank of Canada’s Mark Carney spoke to the Canadian Auto Workers union and to reporters earlier on Wednesday and - repeating similar language used last month when keeping rates unchanged - said “some modest withdrawal of the present considerable monetary policy stimulus” might become appropriate.

The Central bank head also said the strong Canadian dollar was not the main cause of the country’s poor export performance, noting the over-exposure to the mature and sluggish U.S. market was a more important factor.

“Governor Carney stuck to his guns despite the softening Canadian economy,” Krishen Rangasamy, economist at National Bank Financial Group, said in a note to clients.

“The downplaying of the strong Canadian dollar and the suggestion that the Bank will support efforts by the federal government on the housing market, signal that the BoC is not prepared to lower interest rates. The tightening bias remains.”

Canadian bond prices picked up across the curve, with the two-year bond adding 12 Canadian cents to yield 1.122 percent and the benchmark 10-year bond gaining 74 Canadian cents to yield 1.850 percent.

Editing by Andre Grenon

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