Bloomberg News

Canada’s Dollar Declines Most This Month on Euro-Zone Comments

October 17, 2011

Oct. 17 (Bloomberg) -- Canada’s dollar posted its biggest decline this month as comments from German officials that there’s no quick fix for Europe’s sovereign debt crisis eroded appetite for higher-yielding assets.

The loonie, as the currency is nicknamed, weakened against its U.S. counterpart on declines in stocks and crude oil, the nation’s largest export, after earlier touching a three-week high. German Chancellor Angela Merkel said “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today.

“Those comments by German policy makers have really put an element of uncertainty back into the markets, and the loonie is following along,” said Rahim Madhavji, president of Knightsbridge Foreign Exchange Inc., in a telephone interview from Toronto. “The optimism that built up last week isn’t there anymore.”

The Canadian currency weakened 1.3 percent, its biggest drop since Sept. 30, to C$1.0234 per U.S. dollar at 5 p.m. in Toronto. It fell as low as C$1.0226 after touching C$1.0044, the strongest level since Sept. 21. One Canadian dollar buys 97.71 U.S. cents.

Stocks, Oil

The Standard & Poor’s 500 Index fell 1.9 percent, while Canada’s benchmark Standard & Poor’s/TSX Composite Index declined 1.3 percent. Futures on crude oil, Canada’s biggest export, lost 1.1 percent to $86.29 a barrel in New York.

The Canadian currency capped two weeks of gains on Oct. 14 on speculation an economic slowdown in the U.S., the nation’s largest trading partner, won’t be as severe as forecasters previously expected.

“Risk-off sentiment is back, and as equity markets sell off we have the U.S. dollar moving higher against the loonie,” Jim Phoenix, managing director at Canadian Imperial Bank of Commerce, said in a telephone interview from Calgary. “The mood has shifted somewhat in reaction to concerns that we’re not necessarily going to see a definitive decision out of Europe by this weekend.”

Canadian government bonds rose, pushing the 10-year yield lower by 11 basis points, or 0.11 percentage point, to 2.29 percent. Ten-year yields reached a record low 1.994 percent on Oct. 4. They trade at about 14 basis points above U.S. 10-year yields, compared with 31 basis points on Oct. 3.

Bond Sale

Canada will auction C$3.5 billion of two-year notes on Oct. 19, according to the central bank’s website. The previous auction of two-year bonds, on Sept. 14, fetched an average yield of 1.03 percent and a bid-to-coverage ratio of 2.53 times, Bank of Canada data show.

The Canadian dollar has gained 2.6 percent versus the greenback this month. It’s beating peers along with other commodity-linked currencies such the Brazilian real and the Australian dollar on speculation the U.S. and global economies will avoid another recession.

“It’s definitely a North American and global growth story,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London, in a telephone interview. “It’s the feeling that the pace of the slowdown is moderating.”

Foreigners purchased a net C$7.92 billion ($7.82 billion) of Canadian securities in August, including a net C$6.01 billion of bonds, C$1.61 billion of money-market paper and C$306 million of stocks, Statistics Canada said today in Ottawa. The total is less than the C$10 billion median of three forecasts compiled by Bloomberg.

Foreign Demand

Demand for Canadian bonds from abroad is slowing from a record pace set the past two years. Year-to-date bond purchases of C$31.6 billion are less than half the 2010 level. Some of that money this year has moved to money-market paper, where purchases from January to August have jumped to C$15 billion from C$622 million in 2010.

The Bank of Canada’s quarterly survey of executives found the least optimism about future sales growth since the beginning of 2009, with signs of weak global demand leading companies to curb hiring and investment plans.

The share of firms predicting faster sales growth during the next year fell to 39 percent from 49 percent in the last survey, while those calling for slower sales growth increased to 33 percent from 29 percent.

Canadian Finance Minister Jim Flaherty said today in Dublin that “time is running out” for European leaders to solve a debt crisis that has begun to spread. Flaherty said European officials could have already provided a “definitive solution” to ease market concerns and delays have started to cause “extreme stress” in the continent’s banking sector.

“Euro zone policy makers seem to have some sort of plan and a sense of urgency,” said Knightsbridge’s Madhavji. “They realize what would happen if they don’t come out with that sense of urgency. They are well aware of the situation, they just need to find a way to agree exactly on who pays for everything.”

--With assistance from Greg Quinn in Ottawa. Editors: Paul Cox, Greg Storey

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