By Frank Pingue
TORONTO, July 24 (Reuters) - The Canadian dollar rocketed
more than 1 U.S. cent to a 30-year high on Tuesday as retail
sales data for May flew past estimates and triggered talk of an
aggressive interest rate-hike campaign by the Bank of Canada.
Bond prices, which have bowed to a steady string of robust
Canadian data for much of the year, were pinned lower on the
short end immediately after the retail sales report.
The Canadian dollar closed at C$1.0378 to the U.S. dollar,
or 96.36 U.S. cents, up from C$1.0470 to the U.S. dollar, or
95.51 U.S. cents, at Monday's session close.
Canadian retail sales soared 2.8 percent in May, handily
beating analyst forecasts for a gain of 0.5 percent, to post
the biggest monthly gain in almost a decade.
The report lit a fire under the Canadian dollar, which
vaulted to C$1.0341, or 96.70 U.S. cents, moments after the
data to mark its highest level since February 1977.
"I don't think there's much mystery behind the currency's
rocket launch today," said Doug Porter, deputy chief economist
at BMO Capital Markets. "Retail sales basically sent it into
orbit all by itself, although it got a bit of a helping hand
from underlying weakness in the U.S. dollar."
The U.S. currency was dealing with fears about worsening
credit woes and weakness in the U.S. housing market, which
joined forces to knock the greenback lower versus a host of
Most analysts have been expecting the Bank of Canada to
follow its July 10 rate hike with another quarter-point rate
hike in September, but the retail data put the idea of even
further rate hikes into play.
The Canadian dollar has gained about 11 percent versus the
U.S. dollar since the start of 2007, prompting some analysts to
suggest it could reach par with the greenback before 2008.
But the Canadian dollar has had trouble sticking above the
96 U.S. cents level for any extended period of time. It has
poked its head through the key level several times but it has
been knocked back down repeatedly.
Porter suggested that for the Canadian dollar to find a
comfort zone above the 96 U.S. cent level, oil prices would
have to rebound and head back toward $78 a barrel.
"If this pullback in energy prices we've seen in the last
couple of days builds a bit of a head of steam, then I think
you can see the currency retreating for a while," Porter said.
"But if energy prices start to stabilize again I think the
ground is changing for the Bank of Canada on the economic front
and we might see further gains in the currency."
RETAIL RATTLES BONDS
Canadian bond prices were knocked lower at the short end of
the curve by strong Canadian economic data, a pattern often
seen this year.
The retail sales report was the key economic data for
Canada this week and it extended the recent yield rise.
"I think clearly the retail sales report has driven bond
yields much higher," Porter said.
With the key Canadian report for the week out of the way,
bond dealers will turn their attention to a U.S. report on
existing home sales on Wednesday, new home sales on Thursday
and real GDP on Friday.
But Porter suggested the market will look at Statistics
Canada's Business Conditions Survey of manufacturing industries
due on Friday for a glimpse at how manufacturers view their
prospects given the rise in the currency.
The two-year bond dropped 9 Canadian cents to C$98.35 to
yield 4.689 percent, while the 10-year bond sank 7 Canadian
cents to C$95.81 to yield 4.579 percent.
The yield spread between the two-year and 10-year bond
moved to -11 basis points from -8.3 at the previous close.
The 30-year bond was up 2 Canadian cents at C$108.69 to
yield 4.469 percent. In the United States, the 30-year treasury
yielded 5.037 percent.
The three-month when-issued T-bill yielded 4.58, up from
4.54 percent at the previous close.