Bloomberg News

Canada Dollar Declines Against U.S. Peer on Europe Crisis

June 11, 2012

Canada’s dollar weakened from an almost three-week high against its U.S. counterpart as concern Italy may be the next euro-bloc nation to need a bailout crimped demand for higher-yielding assets.

The currency rose earlier with U.S. stocks and raw materials after Spain asked for as much as 100 billion euros ($125 billion) to save its banking system, making it the fourth member of the union to seek a rescue. Canada’s dollar weakened against the majority of its most-traded peers as Spanish and Italian bonds slid on bets the aid is a short-term solution that won’t be enough to stop turmoil from spreading before Greek elections June 17.

“It’s been a one-way street since the European market came in and we saw renewed pressure on Spanish bonds,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD)’s TD Securities unit, said in a telephone interview. “Sovereign credit-default swap spreads added to that feeling of anxiety in the market.”

Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, depreciated 0.5 percent to C$1.0317 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0201, the strongest since May 22. One Canadian dollar buys 96.93 U.S. cents.

Government bonds rose for a second day, with the yield on benchmark 10-year debt falling five basis points, or 0.05 percentage point, to 1.76 percent. The price of the 2.75 percent securities due in June 2022 rose 46 cents to C$109.07. The yield touched 1.615 percent on June 1, the lowest in at least six decades, on demand for the safest and most liquid of assets.

The government will sell $2.9 billion of three-year securities on June 13, the central bank said on its website. The 1.5 percent securities mature in August 2015.

Oil, Stocks

Crude oil, the nation’s biggest export, declined 1.7 percent after rising as much as 3 percent. The Standard & Poor’s 500 index dropped 1.3 percent after gaining as much as 0.7 percent.

“It’s been a bit of a disappointment that the risk rally surrounding the Spanish bank bailout has not lasted,” Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia (BNS)’s Scotia Capital unit, said in a telephone interview. “People are starting to think that this might be another Band-Aid Europe is putting on the wound and not getting anything resolved.”

Options traders are becoming less bearish on the Canadian dollar. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against the loonie versus contracts to sell, traded at 2.7 percentage points, down from 2.8 percentage points since the end of last week.

Implied Volatility

Risk reversal levels are still elevated. The rate climbed to 3.2 percentage points at the end of May, from as low as 1.35 in January. It averaged 0.9 percentage point since 2007.

Implied volatility for one-month options on the Canadian dollar versus the greenback on June 7 decreased to its lowest level since May 10. It surged to 10.31 percent, the highest point since Jan. 6, after falling to 6.59 percent on April 30. The five-year average is 12 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Seven months after winning a landslide victory, Spanish Prime Minister Mariano Rajoy was forced to abandon his bid to recapitalize banks without external help. Italy has 2 trillion euros of debt, more as a share of its economy than any developed nation other than Greece and Japan.

’Dragged Around’

Spanish and Italian 10-year bonds fell for a fourth day, reversing earlier gains. The Spanish yields rose 29 basis points to 6.51 percent, while the rate on the Italian securities climbed 26 basis points to 6.03 percent.

“The Canadian dollar is being dragged around by general risk sentiment,” John Curran, senior vice president in Toronto at CanadianForex Ltd., an online foreign-exchange dealer, said in a telephone interview. “While it’s good news that the bailout is occurring, there’s still lots more that needs to be addressed.”

Canada’s industrial companies are expected to report that their use of production capacity in the first quarter held steady at 80.5 percent, according to the the median estimate of 11 economists surveyed by Bloomberg. Statistics Canada will release the data on June 14.

The loonie is down 0.1 percent over three months against nine developed-nation peers tracked by Bloomberg Correlation Weighted Indexes. The greenback has gained 4.3 percent and the yen is up 8.4 percent. The euro has slumped 1.7 percent.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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


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