April 23, 2008 / 1:48 PM / 10 years ago

Canadian dollar falls on weak retail sales report

TORONTO (Reuters) - The Canadian dollar fell one percent against the U.S. dollar on Wednesday, largely due to a report that showed an unexpected drop in retail sales in February.

Domestic bond prices rallied on the short end on the data.

At 9:20 a.m. EDT, the Canadian dollar was at C$1.0180 to the U.S. dollar, or 98.23 U.S. cents, down from C$1.0080 to the U.S. dollar, or 99.21 U.S. cents, at Tuesday’s close.

Percentage wise, it was the currency’s biggest drop since March 19.

Much of the decline came after data showed that Canadian retail sales unexpectedly fell 0.7 percent in February. See <ID:nN23473096>. Analysts surveyed by Reuters had forecast, on average, sales to inch higher by 0.1 percent.

It was the first decline in five months and a sign that strong consumer spending may be losing its resilience to the overall economic slowdown.

Ontario, Canada’s most populous province, and the one most exposed to the U.S. economic downturn, saw the biggest drop in its retail sales numbers.

“That is the Bank of Canada’s key fear, that the weakness in manufacturing and trade, which is centered in Ontario, would begin to seep out to the rest of the economy and start to affect the macroeconomic numbers, and that seems to be, to an extent, unfolding,” said David Watt, senior currency strategist at RBC Capital Markets.

The Bank of Canada releases its Monetary Policy Report on Thursday and the market will be watching closely for more details on the bank’s assessment of the economy.

The central bank cut its key lending rate by 50 basis points to 3 percent on Tuesday to help bolster Canada’s economy from the economic downturn in the United States.

Its next scheduled rate announcement is June 10, and most primary dealers expect the key rate to be lowered another 25 basis points. The bank has cut rates by 150 basis points since December.

BONDS MIXED

Bond prices rallied on the short end after the weaker-than-expected retail sales numbers.

“Pretty big moves, and of course the main driver is the retail sales report,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

“It was a pretty through and through negative interpretation, but I think you’ve got to be a little cautious here because we had such a big gain the prior month, so it’s not as though Canadian consumers have completely toppled over.”

Canadian retailers posted a 1.4 percent jump in sales in January.

The overnight Canadian LIBOR rate LIBOR01 was at 3.1067 percent, down from 3.1717 percent on Tuesday.

Tuesday’s CORRA rate CORRA= was 3.0075 percent, down from 3.4724 percent on Monday. The Bank of Canada publishes the previous day’s rate at around 9 a.m. daily.

The two-year bond rose 8 Canadian cents to C$102.00 to yield 2.766 percent. The 10-year bond dipped 7 Canadian cents to C$102.68 to yield 3.650 percent.

The yield spread between the two- and 10-year bonds was 88.4 basis points, up from 83.6 basis points at the previous close.

The 30-year bond fell 15 Canadian cents to C$114.65 to yield 4.130 percent. In the United States, the 30-year treasury yielded 4.479 percent.

The three-month when-issued T-bill yielded 2.54 percent, up from 2.52 percent at the previous close.

Reporting by John McCrank; Editing by Scott Anderson

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