Bloomberg News

Canada Dollar Declines as Slower Chinese Growth Weighs on Commodity Demand

March 12, 2012

Canada’s dollar weakened versus its U.S. counterpart on concern the global recovery is slowing after China reported its biggest trade deficit in more than two decades, sapping demand for higher-risk assets.

The currency fell as commodities such as crude oil and copper weakened, boosting the yen and the greenback on haven appeal. Government bonds advanced, driving the benchmark 10-year yield below 2 percent. The U.S. Federal Open Market Committee meets tomorrow to set monetary policy and release the results of its annual bank stress test.

“The Canadian dollar has been consistently weakening in sympathy with the commodity currencies after a disappointment in the Chinese data,” said Stewart Hall, senior currency strategist at Royal Bank of Canada’s RBC Capital unit in Toronto. “Markets have slipped into a Fed induced slumber --you get the sense no one wants to step in front of the Fed bus.”

Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, dropped 0.2 percent to 99.24 cents per U.S. dollar at 5 p.m. in Toronto. It rose as high as 98.73 last week, the most since March 1. One Canadian dollar buys $1.0077.

Crude oil, Canada’s biggest export, fell as much 1.9 percent, its largest decline in nearly week, after the Chinese economic data. China is the world’s second-largest user of oil. U.S. Copper lost 0.5 percent to $3.8335 per pound after earlier depreciating 0.9 percent.

‘Play Any Softness’

The loonie fell against the majority of its 16 most-traded peers tracked by Bloomberg as it rose versus its commodity- linked peers of Australia and New Zealand. Speculation that the economy in the U.S., Canada’s largest trading partner, may be accelerating is benefiting the currency of the world’s 10th- largest economy.

“This is an environment that favors the Canadian dollar,” said Stephen Gallo, head of market analysis in London at Schneider Foreign Exchange. “This is where you want to be looking to play any softness or uncertainty regarding China. I definitely think you want to be looking to short Aussie-CAD for the time being,” he said, referring to a bet that the Australian dollar will weaken versus the Canadian dollar.

The Canadian currency has appreciated 2.9 percent this year against its U.S. counterpart on increased demand for higher- yielding assets on speculation officials will succeed in containing the European sovereign-debt crisis. Canada’s dollar tends to rise and fall along with global equity markets as a proxy for economic growth.

Bonds Rise

The MSCI World (MXWO) Index lost 0.2 percent. The world equity index has a correlation coefficient of 0.83 with the Canadian currency. A reading of one would indicate the two securities move in lockstep.

The benchmark 10-year note rose, pushing the yield down one basis point, 0.01 percentage point, to 2 percent. The price of the 3.25 percent security, due in June 2021, rose 8 cents to C$110.51.

The yield curve, the difference between two- and 10-year notes narrowed to 81 basis points, the least in over three years, compared with a four-year average of 152 basis points. A narrowing yield curve suggests investors anticipate slow economic growth and inflation.

Fed Chairman Ben S. Bernanke said on Jan. 25 after the FOMC’s last gathering that policy makers were considering additional asset purchases to boost growth. The central bank also extended a pledge to keep the benchmark interest rate at almost zero through at least late 2014. The Fed bought $2.3 trillion of securities under the two rounds of so-called quantitative easing from December 2008 to June 2011.

Trade at Parity

Buy the Canadian dollar on rallies to the 99.40 cents area, said Steve Butler, managing director in Toronto at Bank of Nova Scotia (BNS)’s Scotia Capital unit, citing falling equities as a factor in the loonie weakening against the greenback. The Canadian dollar will trade at parity with its U.S. counterpart by the end of the second quarter, according to the median of 40 forecasts compiled by Bloomberg News.

The Canadian currency is the best performer among 10 developed-nation counterparts over the past week, adding 1 percent, according to Bloomberg Correlation Weighted Currency Indexes. The U.S. dollar lost 0.1 percent and the euro gained 0.3 percent.

To contact the reporters on this story: Austen Sherman in New York at asherman18@bloomberg.net; 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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