Bloomberg News

Canada’s Dollar Depreciates After China Raises Interest Rates

July 06, 2011

July 6 (Bloomberg) -- Canada’s dollar fell versus its U.S. counterpart, touching the lowest in almost a week, after the Chinese government increased interest rates to cool its economy, sapping demand for higher-yielding currencies.

The loonie, as the currency is nicknamed, rose for a second day against the euro as traders sold the 17-nation common currency after Moody’s Investors Service cut Portugal’s credit rating to junk yesterday.

“China tapping the brakes will weigh on Canada’s exports,” said Michael Leavitt, an institutional-derivatives broker at MF Global Canada Co. in Montreal. “China is a major commodity importer, so any slowing will reduce the loonie’s attractiveness.”

The Canadian currency dropped 0.2 percent to 96.53 cents per U.S. dollar at 5 p.m. in Toronto, compared with 96.34 cents yesterday. One Canadian dollar buys $1.0360. It rose 0.6 percent to C$1.3823 per euro.

Investors should short the euro against the Canadian dollar because “lingering uncertainty” over peripheral countries will drag down the 17-nation common currency, Valentin Marinov and Andrew Cox, strategists at Citigroup Inc., wrote in a note to clients today.

Euro Position

The position, which is a bet that the euro will depreciate in value, could “prove increasingly attractive” in light of events later this week, including a rate decision by the European Central Bank tomorrow and jobs reports in both the U.S. and Canada on Friday, they wrote.

“The potential for further Canadian dollar strength is high if data continues to surprise to the upside in a similar manner to the building permits release earlier this morning,” Marinov in London and Cox in New York wrote.

The nation’s building permits rose 20.9 percent in May to a seasonally adjusted C$6.43 billion, four times faster than economists forecast, regaining most of the previous month’s drop on increased non-residential work and record activity in Quebec, Statistics Canada said today in Ottawa.

Canada’s economy added 15,000 jobs in June, after boosting payrolls by a net 22,300 positions in May and 58,300 in April, according to the median forecast of 23 economists surveyed by Bloomberg before Statistics Canada data on July 8. The jobless rate held at 7.4 percent, according to the survey.

Jobs Reports

U.S. payroll jobs climbed by 100,000 workers after a 54,000 gain in May, the smallest in eight months, according to the median forecast of economists surveyed by Bloomberg before Labor Department data July 8. The jobless rate held at 9.1 percent.

The ECB will increase its main refinancing rate to 1.50 percent from 1.25 percent, according to all 55 economists in a Bloomberg survey. Swaps traders are betting the ECB will raise its target rate by 81 basis points over the next 12 months.

“What you’re seeing is a euro move, so euro selling off against the dollar, against Swiss franc, against sterling,” said Peter Kinsella, a senior foreign-exchange strategist at Commerzbank AG, by phone from London. “It’s a euro move ahead of the ECB meeting tomorrow. Market participants are taking profit in long euro positions before the meeting. It’s a case of buy the rumor sell the fact.” A long position is a bet that an asset will increase in value.

Canada’s dollar fell against the Swiss franc and the yen after China raised benchmark interest rates for the third time this year as inflation accelerated to the fastest pace since July 2008. The one-year deposit rate rises to 3.5 percent from 3.25 percent, effective tomorrow, the People’s Bank of China said on its website today. The one-year lending rate will increase to 6.56 percent from 6.31 percent.

‘Risk Off’

“Risk is off the table, given the move by China to raise interest rates,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp., by phone from London. “Markets had already come under a little pressure overnight because of the downgrade of Portugal by Moody’s. When risk is taken off the table, people buy the U.S. dollar back.”

Canadian government bonds rose, pushing the benchmark 10- year’s yield down three basis points to 3.04 percent. The price of the 3.25 percent security maturing in June 2021 rose 22 cents to C$101.77.

Canada sold C$3.5 billion of five year bonds today, drawing an average yield of 2.309 percent, according to a statement on the Bank of Canada’s website. There were C$8.7 billion in bids for the 2.75 percent bonds maturing in September 2016, for a bid-to-cover ratio of 2.48 times, compared with a five-auction average of 2.52 times.

Demand for the five-year bonds was “reasonably firm,” Mark E. Chandler, head of Canadian currency and rates strategy at Royal Bank of Canada’s RBC Capital Markets in Toronto, wrote in an e-mail. The bonds yielded about one-quarter basis point below where they were trading before the auction, Chandler said.

The euro weakened against all except one of its 16 major peers and the greenback strengthened against all except two after Moody’s cut Portugal’s credit rating to junk status, stoking speculation the nation will need a second bailout.

--With assistance from Greg Quinn in Ottawa. Editors: Paul Cox, Dennis Fitzgerald

To contact the reporter on this story: Chris Fournier in Halifax, Nova Scotia at cfournier3@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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