Bloomberg News

Canadian Currency Strengthens Versus Euro on Greek Debt Crisis

June 15, 2011

June 15 (Bloomberg) -- Canada’s dollar gained to its strongest level versus the euro in almost three weeks as European bickering and domestic political discord in Greece risked derailing a second bailout for the debt-strapped country.

The currency fell versus the U.S. dollar as data showed Canadian factory sales dropped after the Japanese earthquake disrupted auto production, and manufacturing in the New York region unexpectedly shrank. The greenback climbed versus 15 of its 16 most-traded peers. Canada’s 10-year bond yield dropped the most in nine months, and stocks tumbled.

“We wax and wane in between believing the policy makers are close to a deal on Greece, and then we are left with no answer, which is toxic for the euro,” said Jessica Hoversen, a New York-based analyst at the futures broker MF Global Holdings Ltd. “The Canadian dollar is so tied to the recovery in the U.S., and the weakness in empire manufacturing and industrial production were a little bit disconcerting.”

Canada’s dollar gained 0.7 percent versus the euro to C$1.3884 at 5 p.m. in Toronto, from C$1.3981 yesterday. It touched C$1.3845, the strongest level since May 27.

The loonie, as the Canadian currency is sometimes called for the image of the bird on the C$1 coin, has strengthened 3.1 percent against the euro since reaching a 13-month low of C$1.4380 on June 8.

Resistance Zone

“The late-May, early-June rally in the cross reaffirms the mid-C$1.43 area as a strong zone of resistance for the euro,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, wrote to clients. “We think this area was the only thing standing in the way of the cross reaching 1.50 again.” Resistance is an area on a chart where orders may be clustered.

The Canadian dollar may retest C$1.36 against the euro, Osborne wrote, a level last reached on April 1.

Greek Prime Minister George Papandreou will name a new government tomorrow and call a vote of confidence in parliament as he seeks to pressure rebel lawmakers to back austerity plans needed to secure a new rescue package. Papandreou spoke live on state-run NET TV.

He needs to clinch a vote on 78 billion euros ($111 billion) of budget cuts and asset sales by the end of June to ensure Greece gets a new European Union aid package to avoid the euro area’s first default.

The loonie dropped 1.1 percent to 97.91 cents per U.S. dollar, from 96.82 cents yesterday. It touched 96.71 cents earlier, the strongest level since June 1. One Canadian dollar purchases $1.0214.

Best Performer

The Canadian dollar was the best performer over the past week against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Currency Indexes. The loonie advanced 2 percent, while the U.S. dollar appreciated 1.9 percent.

Stocks dropped, with the Standard & Poor’s 500 Index and the MSCI World Index each tumbling 1.7 percent.

Euro-area finance ministers agreed yesterday to reconvene on June 19 after they failed to reach agreement over a German- led push for bondholders to share part of the cost of a new Greek aid plan. European Central Bank policy makers have warned against proposals that maturities on Greek debt be extended for seven years, an outcome rating companies have said would be considered a default.

Investors still expect the ECB to raise its 1.25 percent benchmark interest rate by 52 basis points in the next 12 months, according to a Credit Suisse Index based on swaps. That compares with a forecast for a boost of 65 basis points in the Bank of Canada’s 1 percent rate, a separate index shows. A basis point is 0.01 percentage point.

‘Modest Pace’

Central-bank Governor Mark Carney restated his forecast that economic growth in Canada is slowing to a “modest pace,” weighed down by temporary factors such as supply-chain disruptions in the auto sector and rising energy prices.

Carney, in a speech in Vancouver, also reiterated that the bank plans to “eventually” raise its benchmark rate.

Canadian government bonds climbed, pushing the yield on the 10-year security down 12 basis points, the biggest intraday drop since Sept. 7, to 2.95 percent. The 3.25 percent note due in June 2021 gained C$1.04 to C$102.57.

Two-year note yields fell 10 basis points to 1.42 percent, the lowest since June 3.

Debt Auction

The government auctioned C$3.5 billion ($3.6 billion) of two-year notes, drawing an average yield of 1.572 percent.

Bids totaling C$8.48 billion were received for the 2 percent securities maturing in August 2013, for a bid-to-cover ratio of 2.42, according to data in a statement today on the Bank of Canada’s Web site. The ratio at the last sale of the securities, on May 11, was 2.52.

Manufacturing sales in Canada fell in April for the second time in three months. They decreased 1.3 percent to C$46.7 billion on a seasonally adjusted basis, Statistics Canada said.

The Federal Reserve Bank of New York’s general economic index, called the Empire State index, dropped to negative 7.8 for June, the lowest level since November, from 11.9 in May. U.S. industrial production rose 0.1 percent in May, less than forecast, Fed data showed.

--Editors: Greg Storey, Dave Liedtka

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

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


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