TORONTO (Reuters) - The Canadian dollar was knocked lower versus the U.S. dollar on Friday morning after a domestic retail sales report missed expectations and supported the case for more Bank of Canada rate cuts.
Domestic bond prices were lower across the curve.
At 9:40 a.m. the Canadian unit was at C$1.0123 to the U.S. dollar, or 98.78 U.S. cents, down from C$1.0013 to the U.S. dollar, or 99.87 U.S. cents, at Thursday close.
The fall in the Canadian currency immediately followed data that showed December was a disappointing month for retailers in Canada aside from the auto sector.
Retail sales rose a softer-than-expected 0.6 percent in December, but outside the auto sector sales fell for the first time in five months, down 0.4 percent, compared with estimates calling for a 0.4 percent rise.
“This provides the Bank of Canada comfort that they can cut interest rates aggressively and have no worries because the Canadian dollar is basically carrying the burden of keeping inflation under control,” said David Watt, senior currency strategist at RBC Capital Markets.
“The reaction was right for the Canadian dollar to weaken off on the headline, but the underlying picture of retail sales in Canada is not that its weakening, so there should be no negative momentum carry through for the Canadian dollar.”
The Bank of Canada cut its key rate by 25 basis points in December and January to 4.00 percent and is expected to cut again when it sets interest rates on March 4.
All of Canada’s primary dealers expect another rate cut in March, but the expectations range from a quarter-point cut to a half-percentage point cut.
“Analysts are suggesting that consumer spending is really where domestic strength is going to come from in economic growth and prosperity in 2008,” said Gareth Sylvester, senior currency strategist at HIFX Plc in San Francisco.
“So in the absence of a strong number it’s just sort of casting some doubt over that and I think its reiterating that the Bank of Canada are going to have to take some action in terms of monetary policy to try and sort of spur some economic activity in Canada.”
Despite the drop in the Canadian dollar, it still stuck within range it has occupied for several weeks now, hovering just around the parity level versus its U.S. counterpart.
Canadian bond prices were lower across the curve as the retails sales data, while missing estimates, did not paint too bleak a picture of the Canadian economy.
“We are not getting signs here that the Canadian economy is struggling all that well outside of the trade sector,” said Watt. “So if in the second half of the year the U.S. economy starts to rebound, then the Canadian economy can look quite strong because the domestic side is still doing fairly well.”
The overnight Canadian Libor rate was 3.9133 percent, down from 3.9183 percent on Thursday.
Thursday’s CORRA rate was 3.9964 percent.
The two-year bond was down 1 Canadian cent at C$101.95 to yield 3.103 percent. The 10-year bond dropped 10 Canadian cents to C$100.95 to yield 3.873 percent.
The yield spread between the two- and 10-year bond was 77.1 basis points, down from 76.4 basis points at the previous close.
The 30-year bond fell 27 Canadian cents to C$112.78 to yield 4.234 percent. In the United States, the 30-year Treasury yielded 4.557 percent.
The three-month when-issued T-bill yielded 3.25 percent, unchanged from the previous close.
Editing by Renato Andrade