Bloomberg News

Canadian Currency Weakens as Current-Account Deficit Increases

November 29, 2012

Canada’s dollar declined versus 10 of its 16 most-traded counterparts as the country’s current- account deficit widened to the second-largest on record.

The currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, briefly extended losses after U.S. House Speaker John Boehner said there had been “no substantive progress” in a budget-deficit showdown that may throw Canada’s biggest trade partner into recession. The loonie earlier approached a three-week high versus the U.S. dollar before erasing gains as data showed exports fell faster than imports.

“The current account has widened to another record number,” Greg Moore, a currency strategist at Toronto-Dominion Bank (TD) in Toronto, said in a telephone interview. “That doesn’t particularly bode well, considering we’re a small export economy. For the Canadian dollar, that trend is picking up a little bit more steam.”

Canada’s currency was little changed at 99.25 cents per U.S. dollar at 5 p.m. in Toronto after weakening as much as 0.2 percent. It gained earlier to 99.12. The loonie touched 99.06 cents on Nov. 27, the strongest since Nov. 7. It has strengthened 0.7 percent this month and 2.9 percent this year. One Canadian dollar purchases $1.0076.

The loonie gained yesterday, after falling for the previous two days, as risk appetite rose on optimism U.S. lawmakers can reach a budget agreement and avoid a fiscal cliff of $607 billion in automatic spending cuts and tax increases set to begin Jan. 1. The shock would cause the world’s biggest economy to contract 0.5 percent next year, according to the Congressional Budget Office.

Boehner ‘Disappointed’

Boehner, a Republican, told reporters today after meeting with Treasury Secretary Timothy Geithner he was “disappointed in where we are” in negotiations. Democrats “have yet to get serious about real spending cuts,” he said. Senate Majority Leader Harry Reid, a Democrat, said President Barack Obama has made his position clear and Democrats need a proposal from Republicans on what sort of spending cuts they want.

“If there is a resolution to the cliff, what’s good for the U.S. is generally good for Canada,” Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York, said in a telephone interview.

The Canadian currency may gain to the strongest level in almost 11 weeks against the greenback after bouncing off a key level of support yesterday, 99.62 cents, said Cilline Bain, a London-based technical analyst at Credit Suisse Group AG. If it strengthens beyond a resistance area from 98.72 to 98.95 cents per U.S. dollar, it could appreciate to 96.32, the strongest since Sept. 14, Bain said.

Resistance refers to an area on a chart where sell orders may be gathered, and support is where there may be buy orders.

Current Account

The loonie weakened after Statistics Canada reported the nation’s current account deficit grew to C$18.9 billion ($19.1 billion) in the third quarter, from C$18.4 billion in the previous three months. The current account is the broadest measure of international trade. Economists surveyed by Bloomberg had forecast a C$19.2 billion gap, according to the median of 16 responses.

The shortfall has widened for four straight quarters, underlining the increasing global strains on the world’s 11th- largest economy, where exports account for one-third of output. Exports of goods fell C$3.7 billion to C$112.7 billion, and imports fell C$2.5 billion from a record high to C$117.6 billion.

The third-quarter deficit trails only the C$19.4 billion reached in the third quarter of 2010, according to the agency.

Growth Report

Canadian economic growth slowed in the third quarter to a 0.8 percent annualized pace, from 1.9 percent from April through June, economists surveyed by Bloomberg News forecast before the government reports the data tomorrow.

Implied volatility for three-month options on the U.S. dollar versus the Canadian currency reached its lowest level today since May 2001, 5.55 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings. The average over the past decade is 9.97 percent.

Government bonds rose, pushing yields on benchmark 10-year debt down one basis point, or 0.01 percentage point, to 1.7 percent. The price of the 2.75 percent securities due in June 2022 increased 10 cents to C$109.13.

The Standard & Poor’s 500 Index advanced as much as 0.7 percent before trimming the gain to 0.4 percent after Boehner’s comments. Futures on crude oil, the nation’s largest export, rose 1.4 percent to $87.71 a barrel in New York after increasing earlier as much as 2.5 percent.

The loonie has climbed 1 percent this year against nine developed-nation counterparts tracked by Bloomberg Correlation- Weighted Indexes. The U.S. dollar has dropped 2.2 percent, and the yen has been the biggest loser, sliding 9 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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