Bloomberg News

Canada’s Dollar Falls Versus Major Peers as Risk Appetite Drops

June 16, 2011

June 16 (Bloomberg) -- The Canadian currency fell against the majority of its 16 most-traded peers, reaching a three-month low versus the U.S. dollar, as speculation Greece’s debt crisis is worsening damped the appeal of higher-yielding assets.

Canada’s dollar, sometimes called the loonie, slid for a second day versus the greenback as manufacturing in the Philadelphia region unexpectedly shrank, adding to evidence the economy of the nation’s largest trading partner is slowing. Stocks and commodities fell.

“People have taken risk off and are staying very neutral and very defensive, and that’s put the Canadian dollar under pressure,” said George Davis, chief technical analyst for fixed income and currency strategy in Toronto at Royal Bank of Canada. “We’re going to continue to trade along with equities; if equities rally, the Canadian dollar will firm up, and vice versa.”

The loonie, nicknamed for the image of the bird on the C$1 coin, declined 0.2 percent to 98.12 cents per U.S. dollar at 5 p.m. in New York, from 97.91 cents yesterday. It depreciated as much as 1.1 percent to 98.99 cents, the weakest since March 17. One Canadian dollar buys $1.0181.

Implied volatility for one-week U.S.-Canadian dollar options surged as much as 131 basis points to 10.24 percent, the highest level since May 16. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

Bonds Climb

Canada’s government bonds climbed, pushing the yield on the five-year note down four basis points, or 0.04 percentage point, to 2.15 percent. It touched 2.12 percent, the lowest level since Nov. 9. The 2 percent security due in June 2016 gained 16 cents to C$99.30. Ten-year note yields fell three basis points to 2.92 percent and touched 2.89 percent, also the least since Nov. 9.

The MSCI World Index of stocks fell 0.8 percent. The Standard & Poor’s 500 Index ended the day up less than 0.2 percent after falling as much as 0.6 percent.

The Federal Reserve Bank of Philadelphia’s general economic index tumbled in June to minus 7.7, the lowest level since July 2009, from 3.9 in May. Readings less than zero signal contraction. The data followed the New York Fed’s Empire State Index yesterday, which showed manufacturing in its region also unexpectedly fell in June.

“We had bad Empire data yesterday, and we have a Philly Fed out that is much weaker than expected,” RBC’s Davis said. “If we do register a daily close above 98.74, it suggests the market is starting to shift its sentiment, becoming a lot less bearish on dollar-Canada.”

Commodities Fall

The loonie dropped as the S&P GSCI Spot Index of raw materials declined 0.4 percent after falling earlier as much as 0.9 percent.

“The Canadian dollar just couldn’t hold on with this risk aversion, and it just ran out of buyers,” said Dean Popplewell, head analyst in Toronto at the online currency-trading firm Oanda Corp.

Canada’s currency trimmed losses today after government data showed U.S. jobless-benefits claims fell more than forecast last week, to 414,000, and housing starts rose more than anticipated last month, to 560,000 at an annual pace.

The loonie also pared its decline after European Union Economic and Monetary Commissioner Olli Rehn said Greece will be able to get funds from the European Union and the International Monetary Fund in July as long as it enacts budget cuts. The IMF backed Rehn in an e-mailed statement.

Confidence Vote

Greek Prime Minister George Papandreou called on his allies in parliament to back his austerity plans that aim to stave off the euro region’s first default.

Papandreou didn’t give any details of the government reshuffle he announced yesterday after his bid to form a unity government with the leading opposition party failed. Defections by key allies fueled investor concern that his grip on power was slipping and chances of default increasing.

Foreign investors bought a net C$8.22 billion ($8.33 billion) of Canadian securities in April, the most since January, Statistics Canada reported. Investments in corporate bonds and government money market paper led the purchases. Foreign acquisitions of Canadian bonds were a record C$96 billion last year.

--With assistance from Theophilos Argitis in Ottawa and Cecile Vannucci and Frederic Tomesco in New York. Editors: Greg Storey, Paul Cox

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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