Bloomberg News

Canadian Dollar Drops on Oil Drop, Concern Earnings Will Weaken

July 10, 2012

Canada’s dollar dropped as investors sought the safety of its U.S. counterpart on concern corporate earnings will trail median forecasts, hampering risk appetite.

The currency fell to the lowest this month versus the greenback and depreciated against a majority of its most-traded counterparts as U.S. stocks fell for a fifth day and crude oil, Canada’s biggest export, fell below $84 a barrel.

“Traders don’t have much to hang their bullish bets on these days,” said Philippe Denolf, a currency trader in Montreal at Laurentian Bank of Canada. “We have a possibly disappointing earnings season kicking off this week. We’ve been seeing good U.S. dollar buying across the board.”

Canada’s currency dropped 0.3 percent to C$1.0226 per U.S. dollar at 5:03 p.m. in Toronto, the lowest level since June 29. One Canadian dollar buys 97.79 U.S. cents.

Concern about the outlook for corporate profits helped the market reverse earlier gains. Profits for S&P 500 companies fell 1.8 percent in the second quarter, according to analyst estimates compiled by Bloomberg. That would be the first decline since 2009, even as sales are projected to grow 2.5 percent.

The Standard & Poor’s 500 Index fell 0.8 percent after gaining as much as 0.7 percent.

Euro Move

The currency rose to almost a two-year high versus the euro as an agreement by European leaders to aid Spanish banks failed to allay concern the debt crisis is eroding growth.

The loonie advanced 0.2 percent to C$1.2526 per euro, close to the C$1.2466 it reached yesterday, which was the highest since June 2010 and close to a record high.

“The market is record short euros,” Dean Popplewell, an analyst in Toronto at the online currency-trading firm Oanda Corp., said in a phone interview. “The one-week goal is to trade in the early $1.21 per euro handle. If that’s successful, that should be able to drag dollar-Canada quite a bit higher, and much quicker than we think.” A short position is a bet that an asset will decline in value.

Popplewell predicted the Canadian currency may depreciate to C$1.05 against the greenback in the shorter-term. Denolf said he sees the loonie at C$1.0335 as soon as this week. The median forecast of 43 economists and analysts in a Bloomberg survey predicts the loonie will weaken to C$1.03 by the end of September.

Oil Trend

Canada’s currency has declined 2.3 percent since the end of March against the greenback as futures on crude oil, Canada’s biggest export, have plunged 18 percent in that period on speculation Europe’s debt crisis will weaken global growth, hampering demand for raw materials.

Crude oil futures declined 2.5 percent to $83.65 a barrel on the New York Mercantile Exchange. Prices have decreased 15 percent this year.

The loonie is becoming more governed by fluctuations in crude prices, correlation studies show. The 30-day correlation coefficient between the Canadian dollar and crude-oil futures rose to 0.88 today, close to the 0.89 level the relationship reached on June 29, the highest level in Bloomberg records dating to May 1993, from 0.30 in February.

“In the short term, there’s still a bit more downside room for the U.S. dollar against the Canadian dollar, but I’m looking to buy dips,” Steve Butler, managing director in Toronto at Bank of Nova Scotia (BNS), said by e-mail. “There’s still too much risk out there, whether it’s from a slowdown in China, European debt or a failure of the U.S. economy to ever turn the corner.”

Economic Data

Housing starts were 222,700 at a seasonally adjusted annual pace in June, up from a revised 217,400 rate in May, Canada Mortgage & Housing Corp. said on its website. Economists forecast a reading of 205,000, according to the median of 21 responses to a Bloomberg News survey.

Changes in Canada’s mortgage rules, implemented by Finance Minister Jim Flaherty to avert a housing bubble, are threatening to end a six-year streak of U.S.-beating economic expansion. The changes, which took effect yesterday, include shortening the maximum length of government-insured mortgages to 25 years from 30 years to quell demand for new homes and curb record household borrowing that Flaherty said has become a greater risk to the economy than slowing growth.

The rule changes make it harder for some buyers to qualify for mortgages. Ebbing demand for homes removes one more driver from the world’s 10th largest economy, said Douglas Porter, deputy chief economist at Bank of Montreal. (BMO) Residential construction was the fastest expanding segment in the first quarter, responsible for almost half of Canada’s 1.9 percent growth as consumer and government spending slowed.

Economic Growth

Canada’s economy is projected to grow by 2.1 percent this year, according to economists surveyed by Bloomberg, down from a pace of 2.4 percent in 2011 and 3.2 percent in 2010. U.S. growth will accelerate to 2.2 percent from 1.7 percent last year, economists project, marking the first time since 2005 Canada has lagged its biggest trading partner. Canada’s average growth of 0.9 percent since 2008 topped the Group of Seven.

Shorter-term government bonds declined for the first time in five days, pushing the yield on the benchmark two-year bond higher by one basis point, or 0.01 percentage point, to 0.97 percent, or 70 basis points more than U.S. yields.

The price of the 2.25 percent Canadian security maturing in August 2014 fell one cent to C$102.62.

Barry Allan, who oversees C$6 billion ($5.9 billion) at Marret Asset Management Inc., is reducing his Canadian holdings to buy U.S. corporate debt because he says American companies are more creditworthy than the U.S. government.

Bond Reading

Corporate bonds are entering an “unprecedented” era where their yields will fall below those of Treasury bonds as the U.S. slips into recession, Allan said in an interview yesterday in Toronto, where he manages hedge and bond funds. As the debt crisis in Europe recedes, U.S. government-bond prices will collapse as elected officials resist resolving the unsustainable $1 trillion deficit, Allan said. Top-rated U.S. companies will prove the best performers and Canadian corporate bonds will suffer for lack of liquidity, he said.

The loonie has gained 1.7 percent this year among 10 developed-nation currencies in Bloomberg Correlation Weighted Indexes, with the U.S. dollar adding 1.9 percent. The leading decliner is the euro, dropping 4.3 percent.

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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