Bloomberg News

Canada’s Dollar Weakens as Crude Oil Falls, Risk Demand Slips

October 13, 2011

Oct. 13 (Bloomberg) -- Canada’s dollar weakened versus its U.S. counterpart as declines in commodities and stocks dimmed the appeal of currencies tied to global economic growth.

The loonie, as the currency is nicknamed, pared its losses as oil, the nation’s biggest export, trimmed an earlier decline. The Canadian currency rose the most yesterday on an intraday basis in two months, rallying with other risk-sensitive assets, on optimism officials will succeed in containing the European sovereign debt crisis. The currency was among the weakest performers today versus the greenback.

“As a result of the pick-up in commodities and in equities, the Canadian dollar is picking up, too,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, referring to the paring of losses in the Canadian currency. “There appears to be some interest to buy equities and that’s shaping the opinion to get long risk.” A long position is a bet an asset will increase in price.

The Canadian currency fell 0.4 percent to C$1.0209 per U.S. dollar at 5 p.m. in Toronto, after earlier dropping as much as 1 percent. It’s headed for a 1.8 percent gain this week. One Canadian dollar buys 97.95 U.S. cents.

The loonie advanced to a three-year high of 94.07 cents on July 26 before plunging below parity. It has averaged 98 cents per U.S. dollar this year, versus a 10-year average of about C$1.20.

Bonds Fall

Yields on Government of Canada 10-year bonds fell six basis points to 2.29 percent today, snapping a six-day string of advances. Yields fell to a record low of 1.99 percent on Oct. 4.

The gap between yields on Canadian government 10-year bonds and U.S. Treasuries of the same maturity was 11 basis points today. The spread was 31 on Oct. 3.

Crude oil futures declined as much as 2.1 percent before trading down 0.6 percent $84.47 on the New York Mercantile Exchange. The S&P GSCI Total Return Index of 24 raw materials fell 0.4 percent.

The Standard & Poor’s 500 Index dropped 0.3 percent after falling as much as 1.4 percent. The S&P/TSX Composite Index declined 1 percent.

September Drop

The currency lost 6.9 percent in September, the most in almost three years, as volatility surged on speculation European officials will fail to contain the region’s debt crisis. One- month implied volatility on the currency pair touched 12.4 percent today and yesterday, the lowest level since Sept. 22. It climbed as high as 16 percent on Oct. 4. The average during the past 10 years is about 10 percent.

Canada’s currency will weaken to C$1.02 versus the U.S. dollar by year-end before rebounding to 98 cents by the close of 2012, according to the median forecast of 35 economists and analysts compiled by Bloomberg. The median forecast from a month ago was for the loonie to end 2011 at 98 cents per U.S. dollar.

Canada’s merchandise trade deficit was narrower than economists forecast in August as exports and imports both rose, government figures showed.

The deficit of C$622 million ($609 million) in August was smaller than the C$1 billion median estimate in a Bloomberg survey with 22 responses. Statistics Canada today also reduced its estimate of July’s deficit to C$539 million from an earlier figure of C$753 million.

European Influence

“The Canadian dollar will benefit from weakness in European currencies, but will also remain somewhat isolated from U.S. domestic risks, particularly on the fiscal front,” said Ned Rumpeltin, head of Group of 10 currency strategy at Standard Chartered Bank in London, by e-mail. “Domestic growth has held up admirably, despite the slowdown in the U.S., and the bilateral trade balance has moderated over time, but has not suffered a big deterioration, despite the strong Canadian dollar.”

Gross domestic product rose 0.3 percent to C$1.26 trillion in July on a seasonally adjusted basis, Statistics Canada said Sept. 30, matching the median forecast in a Bloomberg survey. 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.

--Editors: Paul Cox, Dennis Fitzgerald

To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net

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


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