Bloomberg News

Canadian Dollar Tumbles as European Concern Saps Demand for Risk

November 02, 2011

Nov. 1 (Bloomberg) -- Canada’s dollar depreciated the most in five weeks as renewed concern the European rescue plan will unravel discouraged demand for higher-yielding assets.

The Canadian currency’s appeal dimmed as a measure of implied volatility jumped after Greek Prime Minister George Papandreou pledged to put an agreement reached last week by the European Union to a referendum. Canada’s government bonds rallied, pushing benchmark 10-year yields to the lowest level in almost a month.

“There’s a violent move away from risk,” said Stewart Hall, a currency strategist at Royal Bank of Canada’s RBC Capital Markets in Toronto, in a telephone interview. “A lot of the euphoria that was built up on the back of the agreement to restructure the EFSF is being unwound,” he said, referring to leaders’ plans agreed to last week to enlarge the European Financial Stability Facility.

Canada’s currency decreased 1.9 percent, the most since Sept. 22, to C$1.0204 per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys 98 U.S. cents.

The loonie earlier reduced its loss, tracking equities, after Dow Jones Newswires reported that a Greek Socialist Party official said the call for a referendum is “basically dead.” Papandreou will proceed with plans for a referendum, a government spokesman said in statements on state-run NET TV.

Drop in Stocks

The Standard & Poor’s 500 Index tumbled as much as 3 percent before dropping 2.8 percent. The S&P/TSX Composite Index decreased 1.1 percent after earlier falling 2.8 percent.

One-month implied volatility on the U.S. dollar versus the Canadian currency rose 140 basis points, the most on a closing basis since Sept. 22, to 12.96 percent. It dropped at the end of last week to 10.98 percent, the lowest since Sept. 20.

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

A rally in Canadian government bonds pushed the 10-year yield down 13 basis points, or 0.13 percentage point, to 2.15 percent. The price of the 3.25 percent securities maturing in June 2021 increased C$1.16 to C$109.46. The yield touched 2.11 percent, the lowest level since Oct. 5.

The U.S. dollar remained higher against all of its major counterparts on demand for a refuge in the world’s main reserve currency from European fiscal turmoil.

‘Very Bad Day’

“Everything that is risk-related is having a very bad day,” Jens Nordvig, a managing director of currency research at Nomura Holdings Inc. in New York, said in a telephone interview. “The U.S. dollar is stronger across the board on what’s happening in Europe. The Canadian dollar is going to be much more driven by risk sentiment than by what happens in Canada.”

Canadian Finance Minister Jim Flaherty, speaking yesterday to reporters in Trenton, Ontario, said the Bank of Canada’s mandate will remain unchanged as the government prepared its five-year renewal of the central bank’s inflation target.

Flaherty said the government will announce the range in which the central bank seeks to keep inflation once it completes its review. At the last renewal, in November 2006, the central bank and finance department agreed that the target would remain the 2 percent midpoint of a 1 percent to 3 percent range.

Canada’s currency will trade at C$1.01 by year-end before rebounding to 98 cents per U.S. dollar by the close of 2012, according to the median forecast of 34 economists and analysts in a Bloomberg News survey.

--Editors: Dennis Fitzgerald, 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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