Bloomberg News

Canadian Dollar Drops a Fifth Day Amid U.S. Slowdown Concern

October 04, 2011

Oct. 4 (Bloomberg) -- Canada’s dollar weakened to the lowest level in more than a year on concern the global economy is weakening after Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank stands ready to take additional steps to boost growth.

The Canadian dollar has dropped 3.9 percent against its U.S. counterpart during the past five days, dropping along with the currencies of other commodity exporters including Mexico, Brazil, New Zealand and Australia as raw materials weakened.

“The door opens to the potential of further policy action” by the Fed, said Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital in Toronto. “The focus of late has shifted so much toward Europe that when Mr. Bernanke speaks, it’s just a reminder to markets that there are issues in the U.S. too. Markets are nervous, and the bias is still toward risk aversion.”

The Canadian currency depreciated 0.77 percent to C$1.0617 per U.S. dollar at 2:06 p.m. in Toronto, from C$1.0547 yesterday. It touched C$1.0589, the weakest level since September 2010. One Canadian dollar buys 94.19 U.S. cents.

Sutton said it’s possible the loonie may fall to as low as C$1.08 in the next few days, before rebounding toward parity by the end of the year.

Crude oil for November delivery declined 1.3 percent to $76.61 a barrel in electronic trading on the New York Mercantile Exchange. Oil is Canada’s biggest export and largest source of trade revenue with the U.S.

The Fed “will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” Bernanke said today in testimony to Congress’s Joint Economic Committee in Washington.

European Crisis

European finance ministers meeting in Luxembourg today pushed back a decision on the release of Greece’s next loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of the 110 billion-euro lifeline granted to Greece last year.

“The answer to this risk aversion likely lies within Europe,” said Sutton at Scotiabank. “That answer needs to be fairly broad and include a plan for orderly defaults for Greece, a plan for bank recapitalization and another on how contagion will be ring-fenced.”

The U.S. dollar traded at 77.7 on a 14-day relative strength index against the Canadian dollar, registering the most “overbought” reading since it hit 83.3 on Oct. 27, 2008. A reading above 70 signals that an asset may be due to reverse direction.

Yield Outlook

In a September Bloomberg survey released today, economists cut forecasts for Canadian government bond yields and the policy lending rate on the worsening outlook for the global economy.

Two-year yields will rise from 1.15 percent at the end of the year to 2 percent by the end of 2012, according to the median forecast of 1,031 investors, analysts and traders who are Bloomberg subscribers. In the August survey, the two-year yield was projected to rise to 2.35 percent from 1.20 percent during the same period.

The two-year yield rose one basis point to 0.85 percent. It dropped to a record low 0.76 percent on Sept. 12.

The median forecast for the Bank of Canada’s target rate for overnight loans was cut 25 basis points in the second, third and fourth quarters of 2012, bringing it to 1.5 percent by the end of next year, the survey showed. Policy makers have held the rate steady at 1 percent since September 2010.

‘Tough Outlook’

“We’re pinning a lot of our hopes on the early November period, where we think that there’s a strong chance of a coordinated Group-of-20 action, or Federal Reserve quantitative easing, or some sort of euro-zone package,” Tom Levinson, a currency strategist at ING Groep NV, said by phone today from London. “That’s what’s needed to gain any sort of stability if not improvement in these commodity currencies. If you don’t get that, then it’s a particularly tough outlook.”

The loonie has weakened 2.7 percent in the past three months, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback has gained 8.6 percent, and the yen has gained about 16 percent.

--Editors: Dave Liedtka, Paul Cox

To contact the reporter on this story: Chris Fournier in Halifax, Nova Scotia, at cfournier3@bloomberg.net; Frederic Tomesco in Montreal at tomesco@bloomberg.net.

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


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