Aug. 3 (Bloomberg) — Canadian two-year bonds rose after the country’s biggest trading partner, the U.S., reported spending by consumers fell in June for the first time in nine months and a measure of inflation slowed. The currency rose.
Canada has no economic reports until Thursday and was celebrating the Civic Holiday yesterday. Bonds gained this week as investors sought the perceived safety of government debt following warnings of terrorist attacks in the U.S.
“The markets are settling back down after the terrorism alerts and focusing on the usual event risks,” including economic data, said David Ebata, a managing analyst in Boston at Thomson Financial, a unit of Toronto-based Thomson Corp. “Main risks” in Canada include details released Thursday on the 10- year bond auction next week and Friday’s jobs reports, he said.
At 9:12 a.m. in Toronto, Canada’s 3 percent bond due in June 2006 rose 3 cents to C$99.72, according to Mouvement Desjardins. Its yield dropped 1 basis point, or 0.01 percentage point, to 3.16 percent.
The Investment Dealers Association of Canada recommended the bond market close yesterday for the holiday.
The gap in yields between 10- and two-year bonds in Canada may widen after information on the 10-year debt auction, Ebata said. Also on Thursday, the Bank of Canada will repurchase C$400 million of bonds including 12.5 percent debt due in March 2006 and 11 percent bonds maturing in June 2009, in exchange for 3.25 percent bonds due in Dec. 2006.
U.S. Economy
Today the U.S. said consumer expenditures on goods and services dropped 0.7 percent in June after rising 1 percent in May. The personal consumption expenditures price index, a measure of inflation tied to the report, increased 0.2 percent in June after rising 0.4 percent in the prior month.
Yesterday the U.S. Institute for Supply Management’s index of manufacturing for July rose to 62.0 from 61.1. A reading above 50 indicates net business expansion.
Canada’s dollar rose 0.3 percent to 75.29 U.S. cents from 75.06 U.S. cents late yesterday. One U.S. dollar buys C$1.3282. Canada’s currency earlier today weakened to C$1.3346, the lowest since Thursday.
The currency may depreciate to C$1.36 by the end of the year, said Marc Chandler, chief currency strategist in New York at HSBC Bank USA. Lower natural gas prices are blunting the positive influence of crude oil prices, which rose to a record today, Chandler said of Canadian companies that export the commodities. HSBC is the fifth-biggest currency trader, according to Euromoney magazine.
Currency and Rates
Homeland Security Department Secretary Tom Ridge on Sunday said the U.S. government had “new and unusually specific information” about planned bombings of targets in Washington, New York and northern New Jersey. Much of the information was three to four years old, the New York Times reported today, citing unidentified government officials.
In the past two weeks, Canada’s currency declined 1.5 percent after the central bank left its target interest rate unchanged, while U.S. Federal Reserve Chairman Alan Greenspan suggested interest rates will rise. Canada’s target interest rate is 2 percent, 0.75 percentage point higher than the U.S. benchmark.
The Canadian currency climbed 21 percent against the U.S. dollar last year as the interest-rate gap reached 2.25 percentage points. This year, Canada’s dollar has shed 2.4 percent. The Fed next meets on Aug. 10, followed by the Bank of Canada on Sept. 8.
Volatility
The Bank of Canada said on July 22 that “the withdrawal of monetary stimulus will depend on the evolving prospects for inflation and for pressures on capacity.” It expects to monitor factors including oil and non-energy commodity prices, increases in which can spark inflation.
“Interest rates, crude oil, terrorist alerts all can keep things very volatile” for the markets in coming weeks, Thomson’s Ebata said.
Canada’s so-called core inflation rate, which subtracts eight prices including food and energy, was 1.7 percent in June, quickening from 1.5 percent in the prior month. The central bank aims to keep inflation around 2 percent. The central bank lowered its key rate three times this year to spur domestic spending as a surging currency made exports to the U.S. more expensive.
Exports to the U.S. account for about a third of Canada’s annual output.
To contact the reporter on this story:
Sangeetha Ramaswamy in New York at sramaswamy3@bloomberg.net