Bloomberg News

Canada Dollar Weakens Amid European Bailout Fund Speculation

October 19, 2011

Oct. 19 (Bloomberg) -- Canada’s dollar fell as concern European leaders are divided on proposals to increase a bailout fund to solve the region’s sovereign debt crisis drove investors from higher-yielding assets and currencies.

The Canadian currency had fluctuated as crude oil prices swung between gains and losses. Euro-area officials including French President Nicolas Sarkozy were assembling in Frankfurt to narrow divisions four days before a summit of leaders.

“The headlines that Sarkozy saying talks are ‘stuck’ takes the shine off the recent optimism,” said Firas Askari, head of currency trading in Toronto at Bank of Montreal’s BMO Capital Markets unit, by e-mail today. “That means quick risk-off from risk-on and the Canadian dollar takes it on the chin. The market is jittery, and liquidity is very poor.”

Canada’s currency fell 0.6 percent to C$1.0205 per U.S. dollar by 5 p.m. in Toronto. It touched C$1.0085, almost the strongest since Sept. 21. One Canadian dollar buys 97.99 U.S. cents.

Futures on crude oil dropped 2.6 percent to $86.05 a barrel in New York after gaining as much as 1.3 percent. The correlation coefficient between oil and the Canadian dollar was 0.77 today. The coefficient was as high as 0.86 on Aug. 8 and as low as 11 on Sept. 5. A reading of 1 indicates the measures move in lockstep.

The MSCI World Index dropped 0.2 percent after advancing yesterday. The Standard & Poor’s 500 Index declined 1.3 percent. The one-month correlation coefficient of the loonie, as the Canadian currency is often known, with the two benchmarks is 0.87 and 0.89, respectively.

Currency Volatility

Options trading showed bearishness on the Canadian currency has advanced this week. The premium charged for the right to buy the U.S. dollar versus the Canadian dollar in three months over contracts to sell was 3.2 percentage points today after ending last week at 3. So called risk-reversal rates reached a record 4.43 percentage points on Oct. 4.

Volatility in the greenback versus the Canadian dollar fell after rising for two days. One-month implied volatility on the currency pair was 12.93 percent today, from 12.97 yesterday. It climbed as high as 16 percent on Oct. 4. The average during the past five years is 11.6 percent.

Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

Two-Year Auction

Canada sold C$3.5 billion ($3.5 billion) of two-year bonds today, drawing an average yield of 1.097 percent for the 1 percent securities and a bid to cover ratio of 2.38 times, 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.

Government bonds fell for a second day, pushing the yield on benchmark 10-year debt two basis points higher to 2.33 percent. The price of the 3.25 percent security maturing in June 2021 fell 21 cents to C$107.86.

Canadian government bonds are down 0.9 percent this month, compared with losses of 0.8 percent for U.S. government bonds, according to Bank of America Merrill Lynch data.

Statistics Canada said earlier that the nation’s index of leading indicators dropped 0.1 percent in September, the first decline in a year, led by declines in manufacturing. Economists surveyed by Bloomberg News predicted the index would rise 0.1 percent, according to the median of eight estimates.

--Editors: Dave Liedtka, Greg Storey

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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