Bloomberg News

Canada Dollar Falls for 3rd Day on Growth Concern Before

March 29, 2012

Canada’s dollar fell for a third day against its U.S. counterpart as concern that the rate of global economic growth is slowing dulled appetite for the assets that benefit from expansion.

The currency was headed for a 1.1 percent loss this month versus the greenback, which has gained against all of its 16 most-traded counterparts except the Mexican peso as concern Chinese output is slowing and the European debt crisis isn’t yet resolved spurred refuge demand. Finance Minister Jim Flaherty is due to deliver the nation’s 2012 budget at about 4 p.m. in Ottawa.

“It’s a little bit of a risk-off day, and historically dollar-Canada has been very correlated with risk-on, risk-off,” said David Grad, a foreign-exchange strategist at Bank of America Corp. in New York. “With the more disappointing recent data, people are a little worried, and you are seeing the Canadian dollar take a hit.”

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, weakened 0.1 percent to 99.93 cents per U.S. dollar at 12:44 p.m. in Toronto. One Canadian dollar buys $1.0007.

The loonie is up 0.2 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The U.S. dollar is down 2.2 percent.

Canadian government bonds rose, pushing the yield on the benchmark 10-year (GCAN10YR) note down three basis points, or 0.03 percentage point, to 2.09 percent. It touched 2.08 percent, the lowest since March 13. The 3.25 percent securities maturing in June 2021 rose 24 cents to C$109.63.

Yield Curve

The yield curve, or the difference between two- and 10-year note yields, narrowed to 91 basis points after reaching more than 99 basis points on March 19, the highest level in more than a month. A narrowing yield curve indicates investors anticipate slower economic growth and inflation.

Flaherty lowered government-revenue projections in November, forecasting a C$31 billion ($31 billion) deficit for the fiscal year that ends this month. That update projected the elimination of the deficit by the year starting April 2015, and yesterday Flaherty reiterated the budget will be balanced “in the medium-term.”

An improving fiscal outlook may accelerate a return to balance and ease pressure for austerity measures, which may slow economic growth. The deficit for the fiscal year ending this month will be C$26 billion, Toronto-Dominion Bank (TD) estimated in a March 21 report. Royal Bank of Canada estimated the deficit will be in a C$20 billion to C$25 billion range.

‘Knee-Jerk Reaction’

“There’s not likely to be a significant knee-jerk reaction to the budget,” said Camilla Sutton, head of currency strategy in Toronto at Bank of Nova Scotia (BNS)’s Scotia Capital unit, in a telephone interview. “In the more medium term, it’s likely to be positive. Canada is likely to reach a balanced budget much sooner than its peers. The budget will highlight the stronger aspects of Canada.”

The Canadian dollar may fall toward a 10-week low versus the greenback should it break through a key resistance level, Royal Bank of Canada said, citing trading patterns.

A close above C$1.0051 per U.S. dollar could weaken the loonie all the way to C$1.0215, a price level last reached on Jan. 16, according to a note written by George Davis, chief technical analyst at the bank’s RBC Dominion Securities unit in Toronto. Resistance refers to a level where sell orders may be clustered.

Davis advised investors to short the dollar against Canada’s currency with a target of 99.30 cents per greenback and a stop-loss above C$1.0030 on an hourly closing basis. A short is a bet that a security will decline in value.

To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net; Austen Sherman in New York at asherman18@bloomberg.net

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


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