Bloomberg News

Canada Dollar Drop Is Largest in Almost Three Years on Economy

October 01, 2011

Oct. 1 (Bloomberg) -- Canada’s dollar depreciated by the most since October 2008 as concern the global economy is sinking back into recession spurred a haven rally in the U.S. currency and dimmed the outlook for commodity prices.

The currency registered weekly and quarterly losses as volatility increased on speculation European officials haven’t contained the region’s debt crisis as the prospect of a Greek default looms. An Oct. 7 government report may show that Canadian job creation is slowing.

“There’s a paranoia in the market,” said Aaron Fennell, a futures specialist at Bank of Nova Scotia’s ScotiaMcLeod unit, by phone yesterday from Toronto. “Traders are waiting to see what happens in Greece. That’s undermined commodity prices, and it’s caused a flight to cash, that’s usually U.S. cash, which pushes up the U.S. dollar and brings down the Canadian dollar.”

The Canadian currency ended yesterday at C$1.0503 per U.S. dollar in Toronto, down 2.2 percent on the week, 7.4 percent on the month and 9 percent on the quarter. It touched C$1.0504 yesterday, the weakest since Sept. 8, 2010. One Canadian dollar buys 95.21 U.S. cents.

The loonie, as Canada’s dollar is known for the image of the aquatic bird on the C$1 coin, advanced to a three-year high of 94.07 cents on July 29 before plunging along with other risk- related assets as investors, concerned that a potential Greek default may spark a run on European banks and send the global economy into another recession, took refuge in the U.S. dollar and the yen.

Parity Play

“I don’t think we’re going to spend much time above parity for the rest of this year,” Fennel said, referring to the Canadian dollar trading on a one-for-one basis with the U.S. currency. “Until we actually have a resolution in Europe, then we really have this big huge unknown in the marketplace.”

Options trading showed further losses in the currency may be imminent. The premium charged for the right to buy the U.S. dollar versus the Canadian dollar in three months over contracts to sell reached a record 4.235 percentage points yesterday, so called risk-reversal rates show.

Volatility in the U.S. dollar versus its Canadian counterpart remained elevated. One-month implied volatility on the currency pair ended yesterday at 14.5 percent, after climbing Sept. 22 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.

Bonds Drop

Government bonds fell this week, pushing the 10-year note’s yield higher by eight basis points, or 0.08 percentage point, to 2.15 percent. Yields climbed for five straight days after dropping to a record low 1.994 percent on Sept. 23. The price of the 3.25 percent security maturing in June 2021 dropped 74 cents to C$109.53.

Canada’s government bonds have returned 7.5 percent this year, according to a Bank of America Merrill Lynch index.

Gross domestic product rose 0.3 percent to C$1.26 trillion ($1.2 trillion) in July on a seasonally adjusted basis, matching the median estimate in a Bloomberg survey with 23 responses, Statistics Canada said yesterday.

The first monthly report on output for the third quarter suggested the economy has resumed growth after shrinking in the April-to-June period. Economists surveyed by Bloomberg last month predict a third-quarter annualized growth rate of 2 percent, averting a recession.

Jobs Gains

Canadian employers added 15,000 jobs in September after cutting 5,500 positions in August, according to the median of 23 estimates compiled by Bloomberg. That would mean employers added 16,500 jobs in the third quarter, compared with 109,000 in the second quarter and 82,800 in the first three months of the year. Statistics Canada is due to report the employment data on Oct. 7 at 7 a.m. in Ottawa.

Canada’s federal budget deficit more than tripled in July, widening during the month to C$1.6 billion, from C$473 million a year earlier on falling revenue from corporate and sales taxes, according to a statement released yesterday by Canada’s finance department. Finance Minister Jim Flaherty has said the government’s fiscal projections for the current year remain consistent with forecasts even amid indications the economy has slowed.

Crude oil, Canada’s largest export, posted its largest quarterly decline in New York since the 2008 financial crisis, 17 percent, as signs of slowing growth in China, the U.S. and Germany heightened concerns that fuel demand will suffer. Crude for November delivery on the New York Mercantile Exchange fell 1.5 percent this week to $78.75 a barrel.

The Standard & Poor’s 500 Index retreated 2.5 percent and finished with the biggest quarterly drop since 2008. Equity losses forced portfolio managers to sell the Canadian dollar to buy greenbacks for monthly rebalancing of portfolios, according to Shane Enright at Canadian Imperial Bank of Commerce.

“Month-end flows are dominating,” said Enright, executive director at the bank’s CIBC World Markets in Toronto, by e-mail yesterday. “Also quarter-end, which compounds the volatility.”

--Editor: Paul Cox, Dave Liedtka

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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