Bloomberg News

Canadian Currency in Tightest Range Since 1996 as Growth Slows

December 01, 2012

Canada’s dollar traded in the tightest weekly range in 16 years as economic growth slowed more than forecast and U.S. lawmakers struggled in a budget showdown that may push the nation’s biggest trade partner into recession.

The currency fell versus its U.S. peer this week as Bank of Canada Governor Mark Carney was named to head the Bank of England, spurring speculation over who will replace him in Ottawa. The BOC meets next week on interest rates. Canadian 10- year government bond yields slid the most in two months as investors sought safety amid data that included the nation’s second-largest current-account deficit on record.

“Investors are looking at local data as a source of potential transient volatility, and looking at the American fiscal cliff to figure out the long-term trajectory of the Canadian dollar,” Ravi Bharadwaj, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a telephone interview. “Given that there is no consensus, we’ve seen the Canadian dollar huddle to very tight ranges.”

The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated 0.2 percent to 99.44 cents per U.S. dollar this week in Toronto. It traded between 99.62 and 99.06 cents, the narrowest range since September 1996, after strengthening for the previous two weeks. One Canadian dollar buys $1.0056.

Canada’s currency still gained for the month, strengthening 0.5 percent and rising against most major counterparts.

Volatility Drops

Implied volatility for three-month options on the U.S. dollar versus the Canadian currency fell to its lowest level in more than 11 years. It reached 5.55 percent on Nov. 29, the least since May 2001. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings. The 10-year average is 9.97 percent.

Carney, 47, a former Goldman Sachs Group Inc. managing director, was named BOC governor in 2008. He was unexpectedly appointed to run the British central bank, effective in July, after previously signaling he wasn’t a candidate for the job.

“It creates tremendous uncertainty for Canada in the sense that we don’t know who the next head of the Bank of Canada will be,” Camilla Sutton, chief currency strategist in Toronto at Bank of Nova Scotia’s Scotiabank, said Nov. 26 in a telephone interview. “Uncertainty typically isn’t very good for currency markets.”

Bank Meeting

The Canadian central bank meets Dec. 4 after reports this week on gross domestic product and the current-account deficit signaled the nation’s economic outlook is not as robust as it was considered earlier this year. It has kept the benchmark interest rate at 1 percent since September 2010.

Carney has said since April that tighter monetary policy might “become appropriate” as the nation’s economy moved toward full output. He said last month his inclination to raise interest rates had become “less imminent” given risk to economic growth.

Canada’s gross domestic product expanded at an annualized 0.6 percent from July through September, the slowest in more than a year, the nation’s statistics agency reported yesterday. A Bloomberg News survey of economists forecast 0.8 percent growth. The agency also revised its second-quarter GDP figure to 1.7 percent, from 1.9 percent.

“It is a miss, unquestionably,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said of the economic data in a telephone interview yesterday. “The trend of slower growth in Canada is going to have an impact from a broad perspective.”

Current Account

Canada’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 government said Nov. 29. The current account is the broadest measure of international trade.

Government bonds climbed, sending yields to two-month lows. Benchmark 10-year yields slid nine basis points, or 0.09 percentage point, the most since the week ended Sept. 28, to 1.7 percent. The price of the 2.75 percent securities due in June 2022 gained 78 cents to C$109.19.

Five-year yields lost eight basis points, also the most since Sept. 28.

The loonie fell versus 10 of its 16 most-traded peers this week as U.S. officials tried to reach a budget-deficit accord. If they fail, America faces a $607 billion fiscal cliff of automatic spending cuts and tax increases starting Jan. 1. The shock would cause the world’s biggest economy to contract 0.5 percent next year, according to the Congressional Budget Office.

Net Longs

Futures traders increased their bets the Canadian dollar will gain against the greenback, figures from the Washington- based Commodity Futures Trading Commission showed.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the Canadian dollar compared with those on a drop -- so-called net longs -- was 62,379 on Nov. 27. That was 1.5 percent more than the net longs of 61,446 a week earlier, the lowest level since August.

Canada’s currency has gained 0.8 percent this year versus nine developed-nation peers tracked by Bloomberg Correlation- Weighted Indexes. The greenback has dropped 2.1 percent, and the yen has been the biggest loser, tumbling 9.4 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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