Bloomberg News

Canada’s Dollar Drops to Seven-Week Low as Risk Aversion Rises

November 24, 2011

Nov. 23 (Bloomberg) -- Canada’s dollar slid to the lowest level in seven weeks versus its U.S. counterpart after Germany’s failure to get the full amount of bids in a debt auction sparked a selloff in higher-yielding assets.

The currency has fallen 4.5 percent against the greenback this month as crude oil, Canada’s largest export, failed to sustain a rally above $100 a barrel and stocks retreated. Raw materials such as gold and copper that account for about half the nation’s export revenue declined after manufacturing in China slowed.

“The momentum is certainly for a weaker Canadian dollar,” Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, said in a telephone interview. “The current market mood is very pessimistic.”

Canada’s currency, also known as the loonie, dropped 1 percent to C$1.0486 per U.S. dollar at 5 p.m. in Toronto after falling to C$1.0498, its weakest level since Oct. 5. One Canadian dollar buys 95.37 U.S. cents.

There’s “potential” for the loonie to depreciate toward C$1.06 by the end of this week, Bennenbroek said.

Canada auctioned C$3.5 billion ($3.3 billion) of 1.5 percent notes maturing in March 2017 today, fetching an average yield of 1.441 percent and a ratio of bids to the amount on offer of 2.225 times. Yields on Oct. 12, the last time the government sold five-year bonds, averaged 1.73 percent, and demand exceeded supply by 2.32 times.

Yields on benchmark five-year government notes fell three basis points today, or 0.03 percentage point, to 1.32 percent, as the 2.75 percent debt due in September 2016 climbed 12 cents to C$106.55. The difference between yields on five-year Canadian government bonds and U.S. Treasuries of the same maturity tightened four basis points to 45 basis points.

30-Year Yield Drops

Benchmark 30-year yields dropped to 2.626 percent, the lowest in Bloomberg records dating to August 1992.

Germany missed its 6 billion euro ($8 billion) maximum sales target at a 10-year bond auction today by 35 percent, prompting investors to question the status of the securities as a haven from the region’s debt crisis. The bunds drew a yield of 1.98 percent.

“Certainly the one debt market that has been rock solid through this entire European debt crisis has been the German bund market, so the fact that bids fell short at today’s auction was certainly disquieting,” said Wells Fargo’s Bennenbroek. “We’re seeing European bond markets and European equity markets under some pressure, and U.S. equity markets as well.”

Greenback Gains

The U.S. dollar rose versus all of its 16 most-traded peers as a gauge of European services and manufacturing output shrank and data signaled China’s manufacturing will tumble. The euro slid further after European Union Economic and Monetary Affairs Commissioner Olli Rehn said the financial crisis is “ravaging Europe.”

“Things are bad,” said Firas Askari, head of currency trading at Bank of Montreal’s BMO Capital Markets in Toronto, in an e-mail message. “With Europe in a debt nightmare, the U.S. with a $15 trillion deficit and even China’s growth showing signs of vulnerability, what will lead us out of this?”

The European debt crisis “appears barely contained,” Bank of Canada Governor Mark Carney wrote in the text of a speech to a business audience in Montreal today. “The global economic outlook has weakened considerably and financial market volatility has increased.”

Carney, 46, said he will keep “considerable monetary stimulus” in place even amid signs the economy is growing faster than forecast, citing a weakening global outlook and financial market volatility.

Rising Energy Prices

The Bank of Canada has kept its benchmark rate at 1 percent since September 2010, even as rising energy prices drove the country’s inflation rate higher. Consumer prices rose 2.9 percent in October from a year earlier, according to Statistics Canada. The central bank aims to keep inflation in the middle of a 1 percent-to-3 percent range.

Canadian Finance Minister Jim Flaherty said the results of the German bond auction today show the region’s debt crisis is increasingly becoming a “global problem.”

Speaking to reporters outside Parliament, Flaherty said the sale underscores the urgent need for action by European leaders.

--With assistance from Andrew Mayeda, Theophilos Argitis and Greg Quinn in Ottawa. Editors: Kenneth Pringle, 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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