Bloomberg News

Canadian Dollar Drops Versus Most Peers on Prospects for Economy

June 02, 2011

June 2 (Bloomberg) -- Canada’s dollar fluctuated versus its U.S. counterpart and fell against a majority of its 16 most- traded peers as data showed the recovery of the world’s largest economy may be faltering.

The Canadian currency, sometimes called the loonie, touched a one-week low against the greenback before data tomorrow forecast to show U.S. job growth is slowing. The loonie fell versus the euro on speculation a higher default risk for Greece will cut demand for currencies of commodity exporters. Oil, Canada’s biggest export, reached the cheapest level in a week.

“The main driver of the Canadian dollar at this point in time is the slowdown in the U.S. economy, which is negatively impacting the currency,” said Lee Hardman, a foreign-exchange strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd.

Canada’s currency gained 0.1 percent to 97.59 cents per U.S. dollar at 5 p.m. in Toronto, from 97.72 cents yesterday. It dropped as much as 0.4 percent to 98.10 cents, its weakest level since May 26. One Canadian dollar buys $1.0247.

Government bonds fell, pushing Canada’s benchmark two-year note yield up three basis points to 1.48 percent. It decreased earlier to 1.44 percent, the lowest level since November. The 1.75 percent security, which matures in March 2013, declined 6 cents to C$100.46. A basis point is 0.01 percentage point.

The gap in yield between the Canadian security and two-year Treasuries widened one basis point to 1.03 percentage points.

U.S. Payrolls

Nonfarm payrolls in the U.S., Canada’s biggest trading partner, added 165,000 workers in May, according to economists in a Bloomberg News survey, after gaining 244,000 the previous month. Reports today showed initial claims for unemployment benefits dropped less than forecast, while factory orders declined the most by almost a year.

“The market typically is reluctant to take on new positioning ahead of a significant number like tomorrow’s payroll number,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “Given the tone of most economic releases recently coming out of the States, I think there’s likely to be a miss.”

Canada ships about three-quarters of its exports to the U.S.

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, touched a four-week low against the euro after Greece’s risk of default was raised to 50 percent by Moody’s Investors Service. European officials rushed to put together the second bailout plan in two years to stave off renewed financial turmoil in the region.

Merkel, Moody’s

Canada’s currency depreciated 1 percent to C$1.4143 per euro and touched C$1.4169, the weakest level since May 5. Europe’s shared currency rose after German Chancellor Angela Merkel said she’s committed to it and Moody’s said if there’s no progress on increasing the U.S. statutory debt limit in coming weeks, it expects to place America’s rating under review for possible downgrade.

Crude oil for July delivery dropped as much as 1.8 percent to $98.46 a barrel in New York, the lowest since May 25, before trading at $100.89. Global stocks fell, with the MSCI World Index down 0.8 percent, while U.S. stocks fluctuated.

“The Canadian dollar is still very much a barometer of risk appetite,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto. “It tends to underperform when risk assets and equity markets, for example, are not doing particularly well.”

Jobless Claims

The loonie fell earlier versus the greenback after U.S. Labor Department data showed initial claims for jobless benefits declined by 6,000 last week to 422,000, compared with a Bloomberg News survey forecast of 417,000. Orders placed with factories fell in April 1.2 percent, a Commerce Department report showed.

ADP Employer Services said yesterday U.S. companies added 38,000 workers in May, compared with 177,000 the previous month.

“When we see those negative data for the U.S., it certainly seems to spread over to Canada quite frequently,” said Steve Butler, managing director of foreign-exchange trading in Toronto at Bank of Nova Scotia’s Scotia Capital unit.

The loonie tumbled the most today against the South African currency. It depreciated 1.7 percent to 6.8764 rand.

Canada’s dollar is poised to decline to parity with its U.S. counterpart after closing below a key technical level, according to Bank of America Corp. The loonie ended yesterday weaker than its 100-day moving average of 97.51 cents per U.S. dollar, indicating it may depreciate further, MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at Bank of America in New York, said in a telephone interview.

Last at Parity

The currency last traded on a one-for-one basis with the U.S. dollar on Feb. 1 and has gained 1.5 percent since then.

While the American dollar is still in a long-term weakening trend as U.S. economic growth slows and central banks of other developed nations raise interest rates before the Federal Reserve, the Canadian currency’s technical break may mean a temporary change in the situation, Curry said.

The greenback may strengthen as investors’ appetite for risk weakens after a Federal Reserve stimulus program to purchase $600 billion of Treasuries ends this month, Bank of Tokyo-Mitsubishi’s Hardman said.

“We would recommend buying the U.S. dollar on dips against the Canadian dollar in the near term,” Hardman said.

--With assistance from Catarina Saraiva in New York. Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Cecile Vannucci in New York at cvannucci1@bloomberg.net; Chris Fournier in Halifax, Nova Scotia at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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