Bloomberg News

Canada’s Dollar Falls as Equity Markets Reflect Europe Concern

November 01, 2011

Oct. 31 (Bloomberg) -- Canada’s dollar fell against its U.S. counterpart as concern that European leaders will struggle to rein in the region’s debt crisis eroded risk appetite.

The loonie, as the currency is nicknamed, posted a 5 percent gain this month, the most since it rose 7.9 percent in July 2009. The currency declined today after Japan intervened in currency markets to weaken the yen, sending the U.S. dollar higher against all of its 16 major counterparts.

“Sentiment in markets now is still a bit negative,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York, in a phone interview. “There’s stress in the European banking system that’s weighing on equities and risk- correlated currencies such as the Canadian dollar.”

Canada’s currency fell 0.9 percent to C$1.0008 per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys 99.92 U.S. cents.

The Standard & Poor’s 500 Index fell 2.5 percent while Canada’s benchmark S&P/TSX Composite Index was down 2.1 percent.

Volatility in the Canadian dollar versus the greenback rose for the first time in seven days after reaching the lowest level in more than a month. One-month implied volatility on the currency pair climbed to 11.6 percent today. It dropped to 11 percent at the end of last week, the lowest level since Sept. 21. It climbed as high as 16 percent on Oct. 4. The average during the past five years is 11.6 percent.

Price Swings

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

Canada’s government bonds rose, pulling the benchmark 10- year yield down 15 basis points, or 0.15 percentage point, to 2.28 percent. The price of the 3.25 percent security maturing in June 2021 climbed C$1.29 to C$108.31.

Canadian government bonds have lost 1 percent this month, according to a Bank of America Merrill Lynch index.

The Canadian currency, which capped a fourth weekly advance on Oct. 28 on optimism Europe’s leaders will manage to contain the region’s debt crisis, outperformed a majority of its most- traded peers today. The loonie briefly pared losses after Statistics Canada reported the nation’s economy expanded in August for a third straight month.

McCormick said he sees the Canadian dollar weakening to C$1.02 by year-end.

Euro Watch

“It hinges on the euro zone,” McCormick said. “Euro-zone markets are going to be on the defensive for the rest of the year. With the euro-zone banking crisis driving risk sentiment, the Canadian dollar is going to get caught up in that.”

Euro-region’s leaders agreed on Oct. 27 to increase their bailout fund to 1 trillion euros ($1.4 trillion), recapitalize banks and convinced banks to write down their holdings of Greek debt by 50 percent. While the help of China and cooperation of the International Monetary Fund were immediately sought, pledges of hard cash are proving hard to come by as Group of 20 members press for more details of the plan.

“The details of the euro package will be the catalyst for how markets react for the rest of the calendar year,” said Firas Askari, head of currency trading in Toronto at Bank of Montreal’s BMO Capital Markets unit, by e-mail. “I like the Canadian dollar fundamentally, but if one anticipates another risk-off scenario before year-end, then there will probably be better levels to buy.”

Economic Growth

Canada’s gross domestic product gained for a third month in August, rising 0.3 percent during the month on a seasonally adjusted basis. Economists expected a 0.2 percent gain, according to the median estimate in a Bloomberg survey with 24 responses. The agency also raised its July growth estimate to 0.4 percent from an initially reported 0.3 percent.

The nation’s employers added 15,000 jobs in October, after a gain of 60,900 in September, according to the median forecast of 26 economists in a Bloomberg News survey. Statistics Canada will release the data on Nov. 4 at 7 a.m.

The loonie is down 4.2 percent this year for the worst performance in a gauge of 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The greenback is down 3.3 percent. The Swiss franc is up 3.7 percent.

“The Canadian dollar is not on the top of people’s lists to be investing in right now,” said John Curran, senior vice president at the online foreign exchange dealer CanadianForex Ltd. in a telephone interview. “People got a little bit optimistic on its prospects.”

Canada’s economy will expand by 2 percent this year and next, the International Monetary Fund said today. While the IMF sees the economy growing by 2.6 percent in 2013, The Bank of Canada’s forecast for 2.9 percent in 2013 are “clearly reachable,” because there is room for Canada to lower unemployment and boost “capacity utilization,” Gian Maria Milesi-Ferretti, assistant director of the IMF’s North American Division, told reporters today in Toronto.

The Canadian dollar is “relatively strong” given historical trends and “on the strong side of fundamentals,” Milesi-Ferretti said.

--With assistance from Hugo Miller in Toronto. Editors: Paul Cox, Ken Pringle

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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