Bloomberg News

Canada Dollar Falls as Europe Debt Concern Adds Greenback Demand

January 12, 2012

Jan. 11 (Bloomberg) -- Canada’s dollar dropped for the first time in three days as demand for safety drove its U.S. counterpart higher amid concern Europe’s sovereign-debt crisis is worsening.

The Canadian currency declined against 10 of its 16 most- traded peers amid bets that France’s credit rating may be cut, even as the French finance minister denied being notified of a rating change. Stocks and commodities including crude oil fell. Canada derives about half its export revenue from raw materials.

“There’s a lot of risk on the table with respect to Europe, and the euro is likely to falter as a result,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada, by phone from Toronto. “It creates more of an environment where the flow of funds will be going to the U.S. dollar, and that is going to impact dollar-Canada.”

The Canadian currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, declined 0.4 percent to C$1.0196 per U.S. dollar at 5 p.m. Toronto time. One Canadian dollar buys 98.08 U.S. cents.

The MSCI World Index of equities in developed nations fell 0.3 percent. Crude for February delivery dropped 1.1 percent to $101.02 a barrel.

Bond Losses

Canadian government bonds have returned 0.1 percent this month, according to a Bank of America Merrill Lynch index. Government securities advanced today, with the benchmark 10-year yield falling four basis points, or 0.04 percentage point, to 1.94 percent. It ended 2011 at 1.94 percent, after touching 1.837 percent on Dec. 16, the lowest in Bloomberg records dating to June 1989.

Canada sold C$3.5 billion ($3.4 billion) of 0.75 percent notes due in May 2014, the central bank said on its website. The sale drew an average yield of 0.973 percent and a coverage ratio, the amount bid for every unit of debt sold, of 2.59 times. The average ratio for the previous five auctions of two- year bonds is 2.49 times, according to Bank of Canada data.

The euro weakened for the first time in three days against the dollar and the yen.

“There has been some renewed speculation that France’s AAA rating might be lowered later today by Standard & Poor’s,” which may be weighing on the euro, said Michael Derks, chief strategist at FXPro Financial Services Ltd. in London.

French Reply

French Finance Minister Francois Baroin denied having been notified by a ratings company about a downgrade of France’s top credit rating.

“Any mention of euro in a headline at the moment and people are willing to stomp on the risk-aversion trade,” said Dean Popplewell, head analyst in Toronto at the online-currency trading firm Oanda Corp., in a telephone interview.

The 17-nation common currency also dropped as Fitch Ratings’s head of sovereign ratings, David Riley, said the European Central Bank should boost bond purchases to combat the debt crisis and prevent a collapse of the euro.

Investors should sell the U.S. dollar against the loonie at C$1.0195 to C$1.0250 and take profit when the pair reaches C$1.0150, George Davis, chief technical analyst at Royal Bank of Canada’s RBC Capital Markets in Toronto, wrote in a note to clients today. Investors should exit the trade if the price reaches C$1.0265 on an hourly closing basis, he wrote.

“While yesterday’s daily close below minor support at C$1.0188 is constructive, we stress that prices will have to pierce the December reaction low and double bottom at C$1.0051 in order to place the U.S. dollar bears back on a firmer footing,” Davis wrote in the note. He said a break below that level would shift focus back to the 200-day moving average at 99.20 Canadian cents.

Technical Considerations

Support refers to the lower boundary of a trading range, in this case for the U.S. dollar. A double bottom refers to a level a currency has failed twice to drop below.

Canadian Imperial Bank of Commerce’s CIBC Global Asset Management is betting Canadian corporate bonds will post bigger gains than government debt in 2012 as economic growth slows for a second year.

Company notes are attractive because Canada’s corporations have less debt and higher credit ratings than most of their global peers, said Jeffrey Waldman, who oversees about C$44 billion as first vice president of fixed income at CIBC. Corporate bonds underperformed Canadian federal and provincial notes last year for the first time since 2008 as investors cut back on riskier assets while Europe’s debt crisis intensified.

The loonie gained 1.9 percent over the past month, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The U.S. dollar added 2.1 percent, and the euro fell 4.3 percent.

“We would still be bearish on the Canadian dollar this year versus the U.S. dollar, but it’s going to outperform versus others,” said Derek Halpenny, European head of currency research at Bank of Tokyo-Mitsubishi UFJ Ltd., by phone from London. “The linkages between Canada and the U.S. are obvious. The one surprising element still to date is the performance of the U.S. economy.”

--Editors: Greg Storey, Paul Cox

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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