Bloomberg News

Canadian Dollar Declines From Four-Week High on Global Weakness

September 03, 2011

Sept. 3 (Bloomberg) -- Canada’s dollar fell this week from the highest level in almost a month on concern the global economy may lapse into another recession, dimming the prospects for the nation’s exports of raw materials.

The loonie, as the currency is also known, has tumbled 5.1 percent this year, trailing only the greenback as the worst performer among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. Futures trading indicated better-than-even odds the Bank of Canada, which meets on Sept. 7, will cut borrowing costs by year-end.

“In the next few months there’s going to be enough jitters about global growth that the Canadian dollar is likely to see some weakness and spend some time weaker than parity against the U.S. dollar,” Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, said by phone from Toronto.

The Canadian currency depreciated 0.4 percent to 98.53 cents per U.S. dollar yesterday, from 98.13 cents on Aug. 26. It rallied three days ago to 97.25 cents, the strongest level since Aug. 4. One Canadian dollar buys $1.0149.

The currency advanced to a three-year high of 94.07 cents on July 26 before plunging to below parity Aug. 9. It may slide to C$1.02 by year-end because of “the deteriorating outlook for the U.S. economy,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd., by phone from London. Bank of Tokyo had a forecast of 95 cents in August.

‘Close Links’

“It reflects the close links between the U.S. and Canadian economy,” Hardman said. Canada sends about three-quarters of its exports to the U.S., including almost all of its shipments of crude oil, according to research by Royal Bank of Canada’s RBC Capital Markets.

Canada’s economy shrank at a 0.4 percent annualized pace in the second quarter following a 3.6 percent gain in the first three months of the year, Statistics Canada said Aug. 31. It was the first quarterly contraction since the recession two years ago as a strong loonie boosted imports and curbed exports.

The nation added 24,000 jobs in August after an increase of 7,100 in the previous month, according to the median forecast of 20 economists before a report from the agency on Sept. 9. The unemployment rate is expected to hold at 7.2 percent.

The loonie dropped yesterday after a U.S. Labor Department report showed employment unexpectedly stagnated in August, with the world’s largest economy adding zero jobs and the unemployment rate staying at 9.1 percent. The median forecast of 86 economists in a Bloomberg News survey was for 68,000 additional jobs.

‘Ugly Number’

“It was an ugly number,” said Blake Jespersen, director of foreign exchange at Bank of Montreal, by phone from Toronto. “The Canadian dollar is underperforming on the expectation the U.S. economy is going to continue to slow, and that will have a ripple effect on Canada’s economy.”

The Standard & Poor’s 500 Index dropped 0.2 percent this week after tumbling 2.5 percent yesterday following the U.S. payrolls report. The S&P/TSX Composite Index climbed 2.2 percent. Futures on crude oil, Canada’s biggest export, increased 1.3 percent to $86.45 a barrel this week. The commodity has dropped 5.4 percent this year.

Benchmark 10-year government bonds rose, pushing the yield down nine basis points, or 0.09 percentage point, to 2.30 percent. The price of the 3.25 percent securities due in June 2021 increased 83 cents to C$108.24. The yield fell on Aug. 18 to 2.25 percent, the lowest in Bloomberg data beginning in 1989.

Loonie’s Range

The Canadian currency has traded in a range of 97.26 cents to 99.69 since Aug. 9, when the Federal Reserve announced it would hold its target lending rate at a record low through at least the middle of 2013.

Odds that the Bank of Canada will cut rates at its meeting on Sept. 7 rose yesterday to almost one in five after the U.S. employment figures, and to better than 50 percent for the Dec. 6 meeting, according to Bloomberg calculations based on overnight index swaps.

The central bank has held its target rate for overnight lending between commercial banks at 1 percent since September 2010 after raising it by a quarter-percentage point at each of three successive meetings.

--Editors: Dennis Fitzgerald, Greg Storey

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: Dave Liedtka at dliedtka@bloomberg.net


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