Bloomberg News

Canadian Dollar Weakens to Eight-Month Low as Growth Stagnates

March 02, 2013

The Canadian dollar weakened to the lowest level in eight months against its U.S. counterpart as growth in the world’s 11th-largest economy stagnated and concern increased that European financial turmoil will resume.

The currency fell for the fourth straight week as the economy grew at a 0.6 percent annualized pace from October to December, the slowest since the second quarter of 2011. The report is the last major one before the Bank of Canada meets next week on interest rates. Inconclusive elections in Italy risk jeopardizing deficit-reduction austerity measures, driving investors away from higher-returning assets and currencies.

“Negative sentiment has really turned against the Canadian dollar,” said Blake Jespersen, managing director of foreign exchange at Bank of Montreal, by phone from Toronto. “There’s a lot of pessimism right now with global growth in general.”

The loonie, as the Canadian dollar is known for the image of the waterfowl on the C$1 coin, fell 0.5 percent to C$1.0268 per U.S. dollar in Toronto. The currency touched C$1.034 yesterday, the weakest level since June. One loonie buys 97.39 U.S. cents.

The loonie fell 3.3 percent in February, a second consecutive monthly decline and the biggest drop since May.

Futures on crude oil, Canada’s biggest export, reached their lowest point this year, while the Standard & Poor’s 500 Index of U.S. stocks was little changed.

Policy Meeting

Futures traders reversed wagers the Canadian dollar will rise against the greenback, betting it will fall for the first time in eight months, figures from the Washington-based Commodity Futures Trading Commission show.

Hedge funds and other large speculators had 21,433 more bets the Canadian dollar would fall than bets it would gain, so- called net shorts, on Feb. 26, compared with 19,379 more bets it would gain, or net-longs, a week earlier.

Canada’s benchmark 10-year government bonds rose, with yields falling 14 basis points, or 0.14 percentage point, to 1.80 percent. The 2.75 percent security maturing in June 2022 gained C$1.26 to C$108.08.

Fourth-quarter growth fell short of Bank of Canada Governor Mark Carney’s Jan. 23 projection of a 1 percent expansion rate. Signs the economy is struggling to reach full output led Carney to say that an increase in his benchmark interest rate is “less imminent.” The bank, which meets March 6, has warned interest rates could rise in every policy decision since April.

U.S. Comparison

The U.S. economy expanded in the fourth quarter after contracting in the previous period, a report showed Feb. 28. Gross domestic product grew at a 0.1 percent annual rate, up from a previously estimated 0.1 percent drop, according to revised figures from the Commerce Department.

American factories expanded in February at the fastest pace in almost two years as The Institute for Supply Management’s factory index rose to 54.2, the highest reading since June 2011. Other data showed U.S. consumer spending rose in January.

“People have started to realize that we’re heading to a huge divergence of performance between Canada and the U.S.,” said Clement Gignac, chief economist at Industrial Alliance Insurance and Financial Services Inc., by phone from Quebec City. “So Canada will underperform the U.S. economy.”

Rate Speculation

Canada’s two-year government bonds have risen in the last two weeks, with yields falling 20 basis points to 0.94 percent,, shrinking the Canadian debt’s yield advantage over its U.S. counterpart to 70 basis points, the least since July.

Trading in overnight index swaps suggest a rate cut is more likely than an increase. Derivatives traders priced in a 1.3 percent cut by the Bank of Canada’s May 29 meeting.

“Given the slow growth, it’s highly unlikely the Bank of Canada will be hiking rates any time in 2013,” Adam Button, a currency analyst at Forexlive.com, said by phone from Montreal. “The mythical Bank of Canada rate hike is like the pot of gold at the end of the rainbow, we just keep moving towards it, but it never gets any closer.”

The loonie has fallen 0.87 percent this year among the 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. The U.S. dollar has gained 3 percent and the euro has risen 1.5 percent.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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


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