Bloomberg News

Canada Dollar Falls on European Debt Crisis, Slower U.S. Growth

August 20, 2011

Aug. 20 (Bloomberg) -- Canada’s dollar fell for a fourth week versus its U.S. counterpart in the longest losing streak since June amid concern global growth will falter as the American economy stalls and Europe’s debt crisis worsens.

The loonie, as the currency is nicknamed, dropped against 13 of its 16 most-traded peers as crude oil, Canada’s biggest export, tumbled for a fourth week. Yields on Canada’s 10-year bonds touched a record low as economists cut forecasts for growth in the U.S., the nation’s biggest trade partner. Retail sales in rose 0.6 percent in June, data next week may show.

“U.S. economic weakness is likely to filter into Canadian economic weakness before it filters into other currencies,” Jack Spitz, managing director of foreign exchange at National Bank of Canada, said by phone from Toronto. “Canada is lagging the broader market.”

Canada’s currency depreciated 0.3 percent to 99.01 cents per U.S. dollar yesterday in Toronto, compared with 98.73 cents on Aug. 12. One Canadian dollar buys $1.010. The loonie headed for a monthly loss of 3.5 percent, the most since June 2009.

Government bonds climbed, pushing the yield on the benchmark 10-year note down 15 basis points, or 0.15 percentage point, to 2.30 percent. It touched a record low 2.25 percent on Aug. 18. The price of the 3.25 percent security maturing in June 2021 increased C$1.37 to C$108.26.

Crude oil for September delivery dropped 3.65 percent to $82.26 a barrel on the New York Mercantile Exchange. Raw materials including crude account for about half of Canada’s export revenue.

Growth Questioned

“Crude oil has faltered,” Spitz said. “Growth, not only in emerging markets but certainty from a developed-world standpoint, is being questioned. As a result, crude oil is likely to be sold.”

The economy in the U.S. may expand less than previously forecast in 2011 and 2012 because of potential “political paralysis” and fiscal tightening steps, Citigroup Inc. said Aug. 18 in a report. It cut its 2011 growth forecast to 1.6 percent, from 1.7 percent, and lowered its projection for next year to 2.1 percent, from 2.7 percent.

“The relative weakening of the Canadian dollar over the past 10 days is related to the worsening condition of the U.S economy,” said Joseph Trevisani, chief market analyst at FX Solutions Inc. in Saddle River, New Jersey. “Canadian prospects obviously are closely tied to the U.S.”

European Debt Crisis

European Union officials may push for joint bond sales by euro-area nations to help contain the region’s sovereign-debt crisis, according to EU Economic and Monetary Affairs Commissioner Olli Rehn, putting pressure on Germany to drop its opposition.

Unprecedented bailouts by the trade bloc and the European Central Bank have failed to stamp out debt problems that began in Greece almost two years ago and rattled markets in AAA rated France last week.

Bank of Canada Governor Mark Carney, testifying yesterday to the House of Commons Finance Committee in Ottawa, reiterated that growth will accelerate in the second half of the year, “led by business investment and household expenditures.”

“The market keyed on the fact that there was less talk of potential easing, which the market seemed to have priced in,” Matt Perrier, director of currency sales at Bank of Montreal’s BMO Capital Markets unit in Toronto. “Hikes aren’t imminent, but there was no hint of easing.”

Carney said “several downside risks” have been realized since his July 19 decision to keep the bank’s main lending rate at 1 percent, including a deepening of Europe’s debt crisis and “the persistent strength of the Canadian dollar.”

‘Off the Table’

“Governor Carney still expects domestic demand to propel a bounce in the latter half of the year,” Peter Buchanan and Emanuella Enenajor, economists at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, wrote in a research report. “So, absent a sudden deterioration in global activity exceeding already downbeat expectations, a rate cut this year is likely off the table.”

Core inflation, which excludes eight volatile items including gasoline, quickened last month to a 1.6 percent annual pace, compared with 1.3 percent in June, Statistics Canada said today. That matched economists’ forecast.

“There’s no doubt there’s a little bit of creeping inflation in Canada,” Firas Askari, the head currency trader at Bank of Montreal, said by phone from Toronto, referring to the inflation data. “Generally it’s better for the Canadian dollar.”

Finance Minister Jim Flaherty told lawmakers today strains in the U.S. and Europe haven’t derailed a plan to balance the budget by 2014.

--With assistance from Greg Quinn in Ottawa and Chris Fournier in Halifax. Editors: Greg Storey, Dave Liedtka

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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


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