Bloomberg News

Canada Dollar Falls Versus Most Major Peers as Risk Demand Ebbs

February 24, 2012

Feb. 24 (Bloomberg) -- Canada’s dollar dropped against the majority of its most-traded counterparts as appetite for risk waned and U.S. stocks pared gains.

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, tumbled versus the euro even as crude oil climbed to almost $110 a barrel. Crude is Canada’s biggest export. The loonie traded at about parity with the U.S. dollar and fell for the week.

“It could be argued that the Canadian dollar is not managing to hold on to gains in the oil price,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London.

The Canadian currency weakened 0.2 percent to 99.93 cents per U.S. dollar at 5 p.m. in Toronto and touched C$1.0004, below parity. It fell 0.3 percent on the week. The loonie has traded stronger than a one-for-one basis with the greenback every day this month. One Canadian dollar purchases $1.0007.

The Standard & Poor’s 500 Index ended the day up less than 0.2 percent after increasing as much as 0.4 percent earlier. The S&P/TSX Composite Index declined 0.1 percent after advancing 0.3 percent earlier.

Government bonds rose for a third day, pushing the yield on benchmark 10-year debt down three basis points, or 0.03 percentage point, to 2.02 percent. Canadian government securities have lost 0.6 percent this year, according to a Bank of America Merrill Lynch index.

Lowest Since 2007

Implied volatility for one-month options on the Canadian dollar versus the greenback touched 6.90 percent, the lowest level on an intraday basis since June 2007. It closed at as high as 15.6 percent in September. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency. It averaged about 10 percent over the past decade.

The Canadian dollar “just does not want to move anywhere far from par,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto.

“Ordinarily, lower volatility would be a Canadian-dollar positive, but at historically low levels of implied volatility -- right around the pre-Lehman lows here -- that is perhaps a cautionary tale for risk takers as well,” Osborne said, referring to the September 2008 bankruptcy of Lehman Brothers Holdings Inc. that sparked the financial crisis.

Euro Gains

The Canadian currency dropped for a seventh day versus the euro, the longest losing streak since April, on speculation officials are succeeding in containing the European sovereign- debt crisis. The loonie depreciated as much as 1 percent to C$1.3466 versus the common currency, the weakest since December.

The currency pair “looks set to test back toward C$1.35 as investors continue to close out euro shorts, perhaps in the misguided assumption that Europe is now saved by recent events,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. A short position is a bet that a currency will depreciate.

Crude oil for April delivery rose 0.9 percent to $109.62 a barrel in New York and touched $109.95, the strongest level since May. Canada is the largest supplier of crude to the U.S., the world’s biggest economy.

Central banks in the U.S., Europe and Japan will probably add further extraordinary stimulus by expanding the size of their balance sheets, which already equal 25 percent of their gross domestic product, Bank of Canada Governor Mark Carney said in the text of a speech he’s giving today in New York.

Carney will keep his key interest rate at 1 percent through this year to aid the recovery, and the currency will trade at close to parity with the U.S. dollar, according to Bloomberg surveys of economists. Last month, the central bank predicted economic growth of 2 percent this year, with risks from global demand and household spending.

The Canadian dollar rose 2.1 percent over the past six months against nine developed-nation counterparts monitored by Bloomberg Correlation Weighted Currency Indexes. The U.S. dollar gained 3.9 percent, and the euro dropped 3.4 percent.

--Editors: Greg Storey, Dennis Fitzgerald

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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