Bloomberg News

Canadian Dollar Gains From Below Parity as Risk Aversion Eases

September 12, 2011

Sept. 12 (Bloomberg) -- Canada’s dollar gained from below parity with its U.S. counterpart as risk aversion eased after an Italian government official said Italy and China have had talks about potential investments by the Asian nation in the euro region’s third-largest economy.

The Canadian currency rose versus most of its major peers as U.S. stocks rallied. Earlier it touched its weakest level since January in volatile trading as investors sought refuge in the greenback on concern Greece is moving closer to default.

“That turned the market around,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc., by phone today from New York, referring to speculation on China and Italy. “Stock markets turned on that and went into positive territory. The Canadian dollar and stocks have been fairly correlated. It needs global growth to perform.”

Canada’s currency rose 0.4 percent to 99.27 per U.S. dollar at 5 p.m. in Toronto after dropping earlier as much as 0.6 percent to C$1.0027, the weakest level since Jan. 31. It closed on Sept. 9 at 99.67. The currency was last on a one-for-one level with the greenback on Aug. 9. One Canadian dollar purchases $1.0074.

One-month implied volatility on the currency pair reached 11.6 percent today, the highest level since Aug. 15.

Italian officials have held talks with Chinese counterparts about potential investments in the Mediterranean country, an Italian government official said.

The purchase of Italian bonds by China was not the focus of the talks, which took place in the past few weeks, the official said on condition of anonymity. A spokesman for Italian Finance Minister Giulio Tremonti declined to comment.

Greek Contagion

The Canadian currency, nicknamed the loonie, weakened earlier versus the U.S. dollar as stocks fell amid concern Greece’s debt crisis may spread to Italy and Spain. The euro reached the lowest level since 2001 against the yen on speculation German Chancellor Angela Merkel is preparing for a Greek default.

The Standard & Poor’s 500 Index ended the day up 0.7 percent after earlier falling as much as 1.6 percent. The MSCI World Index of stocks declined 1.1 percent after earlier losing 2.4 percent.

Crude oil, Canada’s biggest export, fluctuated. October futures fell as much as 2.6 percent to $85 a barrel in New York and rose as much as 2 percent to $88.95.

Bonds Fall

Government bonds fell, pushing up yields from record lows they reached earlier. Ten-year note yields rose three basis points, or 0.03 percentage point, to 2.15 percent after earlier dropping to 2.089 percent, the lowest level since at least 1989. Two-year note yields climbed 10 basis points to 0.88 percent after earlier tumbling to a record 0.76 percent.

Canada will sell C$3.5 billion ($3.51 billion) in two-year notes on Sept. 14, according to a central bank statement. The 1.5 percent debt will mature in November 2013.

Finance Minister Jim Flaherty said he won’t back more fiscal stimulus unless something “dramatic” occurs in the global economy.

“What’s been done before can be done again if it’s essential, but it’s not what we expect,” the finance minister said. “What we expect is continuing modest growth in the Canadian economy through the end of this year and in 2012.”

Flaherty declined to comment specifically on the Canadian dollar and its dip below parity.

“These are challenging economic times; we’re going to see some volatility,” he said.

Canada’s net international debt increased for a ninth straight quarter in the April-June period, rising by C$5.1 billion to C$217.8 billion, as foreigners continued to buy Canadian bonds, Statistics Canada said in Ottawa today.

Risk-Reversal Rate

The premium charged for the right to buy the U.S. currency versus the Canadian dollar in one month over contracts to sell reached 2.2 percentage points today, the highest level since Aug. 15, risk-reversal rates show. The rate was as high this year as 2.61 percentage points last month and as low as 0.67 percentage points in March, according to Bloomberg data.

Canada’s dollar depreciated 1.1 percent last week, the second straight five-day decline. The Bank of Canada on Sept. 7 kept its target rate for overnight lending between commercial banks at 1 percent, where it’s been for a year. Policy makers said there’s less need for a rate increase as Europe’s sovereign-debt crisis and a slow U.S. economic rebound hobble the global recovery.

The U.S. consumes about three quarters of Canada’s exports. The two nations generate $1 trillion annually in bilateral trade and investment, and the export of goods to the U.S. accounts for about a fifth of Canada’s gross domestic product, according to the Web site of the U.S. Embassy in Ottawa.

--With assistance from Hugo Miller in Toronto. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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


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