Bloomberg News

Canadian Dollar Reaches Weakest Level in Year on Europe Concern

September 26, 2011

Sept. 26 (Bloomberg) -- Canada’s dollar touched the weakest level in more than a year against its U.S. counterpart in volatile trading amid concern European officials may fail to forestall a spiraling sovereign-debt crisis.

The Canadian currency erased losses as stocks climbed before U.S. markets closed after European officials spoke of plans to tame the crisis. Treasury Secretary Timothy F. Geithner said failure to address it may prompt investors to pull money from banks. A standoff over a U.S. spending bill threatened a government shutdown.

“It’s the lack of a substantial resolution in Europe, combined with the political uncertainties facing the U.S.” that’s weighing on the currency, Jack Spitz, managing director of foreign-exchange sales at National Bank of Canada, said by telephone from Toronto. “The Canadian dollar is a currency that reacts inversely to volatility.”

Canada’s currency closed at C$1.0251 per U.S. dollar at 5 p.m. in Toronto, up 0.3 percent compared with C$1.0281 at the end of last week. It dropped 1 percent earlier today to touch C$1.0386, the weakest level since Sept. 9, 2010. One Canadian dollar buys 97.55 U.S. cents.

The Standard & Poor’s 500 Index rose 2.3 percent, and crude oil for November delivery gained 1.9 percent to $81.34 a barrel in New York. Oil is Canada’s biggest export.

The 14-day relative strength index for the loonie versus the U.S. currency touched to 26.9, falling below 30 for a third straight day. A reading lower than 30 signals that an asset may be due for a rebound.

Implied Volatility

Volatility in the U.S. dollar versus its Canadian counterpart soared. One-month implied volatility on the currency pair touched 15.9 percent, after climbing Sept. 23 to 16 percent, the highest since May 2010. It was 10.1 percent on Aug. 31. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

Finance ministers and central bankers who held weekend talks in Washington urged European officials to intensify efforts to contain the crisis as Greece, which where it began 18 months ago, teetered on the edge of default.

The European Central Bank will likely debate restarting covered-bond purchases and may discuss interest-rate cuts to ease funding strains, a euro-region central bank official said today. German Chancellor Angela Merkel’s comment that leaders must erect a firewall around Greece prompted bets there might be a European version of the U.S.’s Troubled Asset Relief Program.

‘Can That Be Delivered?’

“What matters is what transpires in Europe,” Camilla Sutton, director of currency strategy at Bank of Nova Scotia, Canada’s third-largest lender, said by phone from Toronto. “Analysts now have a unified view of what needs to be done -- a bigger aid package, bank recapitalization and a framework for an orderly default by Greece. The question is, can that be delivered?”

In the U.S., a standoff between congressional Democrats and Republicans over a federal spending bill threatened a government shutdown this week. They disagree over whether to partly offset aid to victims of Hurricane Irene and other national disasters with spending cuts elsewhere.

Canada’s government bonds dropped for a second day, pushing yields on benchmark 10-year debt higher by seven basis points, or 0.07 percentage point, to 2.14 percent. They reached a record low 1.994 percent on Sept. 23 as investors sought the safety of sovereign securities. The price of the 3.25 percent securities due in June 2021 tumbled 66 cents to C$109.61.

Second-Biggest Loser

The loonie has lost 3.4 percent this year versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Currency Indexes. Only the Australian dollar has performed worse, declining 4.8 percent. The economies of both nations rely on exports of raw materials.

Speculators lowered bets on rising commodities prices by the most in 19 months as raw materials tip into their first bear market since 2008 and investors anticipate more losses. Money managers cut the combined net-long position across 18 futures and options by 20 percent in the week ended Sept. 20, the most since February 2010, data from the U.S. Commodity Futures Trading Commission show.

--Editors: Greg Storey, Paul Cox

To contact the reporters on this story: Chris Fournier in Halifax, Nova Scotia at; John Detrixhe in New York at

To contact the editor responsible for this story: Dave Liedtka at

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