Bloomberg News

Canada’s Dollar Reaches 2011 Low as Fed Cites ‘Downside Risks’

September 21, 2011

Sept. 21 (Bloomberg) -- Canada’s dollar fell to the weakest level versus its U.S. counterpart this year, exceeding parity, as the Federal Reserve cited “significant downside risks” to the economy.

The Canadian dollar dropped for a third day as crude oil, Canada’s biggest export, and stocks tumbled after the Fed statement. Prime Minister Stephen Harper said Canadian policy makers are prepared to act to stem an appreciation of the country’s currency caused by speculative capital inflows. The Fed also said after a two-day meeting it will replace some bonds in its portfolio with longer-term debt to cut borrowing costs.

“The response overall in terms of the markets hints that they were expecting more, that they were pricing in something more dramatic” than the Fed provided, said Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital unit in Toronto.

Canada’s dollar, known as the loonie for the image of the aquatic bird on the C$1 coin, depreciated 1.5 percent to C$1.0081 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0089, the weakest since Dec. 27. The three-day losing streak is the longest since the period ended Aug. 8. One Canadian dollar purchases 99.20 U.S. cents.

Crude oil for November delivery fell 2.5 percent to $84.74 a barrel in New York, and the Standard & Poor’s 500 Index dropped 2.9 percent.

Canadian government bonds rose, pushing yields on Canada’s benchmark 10-year note down seven basis points, or 0.07 percentage point, to 2.12 percent. Earlier they increased as much as four basis points. The price of the 3.25 percent securities due in June 2021 gained 64 cents to C$109.83.

‘Downward Pressure’

The Federal Open Market Committee said in a statement it will buy $400 billion of bonds with maturities of six to 30 years through June and will sell an equal amount of debt maturing in three years or less.

The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said.

“A lot of the risk assets did sell off quite quickly after the announcement,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal. “Clearly the market was looking for a more aggressive Fed. As soon as the market saw that the Fed was not going to be as aggressive as they thought, instantly it was in a risk-off mode.”

Growth Concern

The loonie fell earlier versus the greenback as concern economic growth is slowing outweighed data showing higher-than- forecast inflation, discouraging demand for riskier assets. Bank of Canada Governor Mark Carney said yesterday he may keep interest rates low beyond when full output is restored as the domestic recovery is hobbled by a weak economy in the U.S., the nation’s biggest trade partner.

Speculation that the central bank will raise its benchmark overnight target rate from 1 percent this year has faded as Europe’s sovereign-debt crisis and slow U.S. growth fueled concern the global economy may be headed for a recession.

The Canadian economy shrank at a 0.4 percent annualized pace in the second quarter, the government said Aug. 31, the first contraction since the recession two years ago.

“Given current material headwinds, the policy rate can return to its long-run level after inflation is projected to reach the 2 percent target and output is projected to reach its potential,” Carney said in a speech in Saint John, New Brunswick.

Forecasts Cut

The International Monetary Fund lowered Canada’s economic growth forecast yesterday to 2.1 percent for this year from 2.9 percent, citing weaker demand from the U.S. and slower government spending. It said the world economy will expand 4 percent this year and next, compared with June forecasts of 4.3 percent in 2011 and of 4.5 percent in 2012.

Harper, speaking in an interview at Bloomberg’s headquarters in New York, said that while he doesn’t think Canada will attract “extreme” flows of capital because of the country’s close economic links with the U.S., the Bank of Canada isn’t likely to tolerate any appreciation that undermines the country’s economy.

Canadian monetary authorities “would be prepared to intervene if they thought there were movements in the currency that were contrary to the country’s interests and not being driven by actual underlying fundamentals,” Harper said in the interview. Central banks intervene by selling or buying currencies to influence prices.

‘Long Way’

“The government has a very clear intervention policy and hasn’t used it in many years,” Scotia Capital’s Sutton said of Harper’s comments. The Canadian currency is not surging now, “so I suspect we’re a long way from intervention,” she said.

Canada’s dollar has lost 2.3 percent this year versus nine other developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The greenback fell 1.2 percent, while the euro gained 0.3 percent and the yen climbed 5.5 percent.

Canada’s consumer prices advanced 3.1 percent in August from a year earlier after a 2.7 percent gain the previous month, Statistics Canada said today in Ottawa. The median forecast of 26 economists in a Bloomberg News survey was for a 2.9 percent annual pace.

--Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net; 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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