Bloomberg News

Canadian Currency Falls Most in Two Months as Commodities Tumble

April 20, 2013

Canada’s dollar weakened the most in almost two months against its U.S. counterpart as falling commodities and slower inflation stoked bets the world’s 11th- largest economy is faltering.

The currency fell the most since 2011 on April 15 as commodities slid, led by gold, which had its biggest drop since 1983. The Bank of Canada kept its key interest rate at 1 percent while cutting its full-year growth forecast to 1.5 percent, saying economic slack will persist for two years. The inflation rate slowed to 1 percent, the bottom of the central bank’s target range. A report next week may show retail sales slowed.

“People are starting to revisit the big commodity theme, and if you start to think the commodity theme is over, it’s really bad news for the Canadian dollar,” said Clement Gignac, chief economist at Industrial Alliance Insurance and Financial Services Inc., by telephone from Quebec City. “It’s a significant signal.”

The Canadian currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, fell 1.3 percent this week in Toronto to C$1.0266 per U.S. dollar. It was the biggest weekly drop since Feb. 22. One Canadian dollar purchases 97.41 U.S. cents.

The loonie sank 1.2 percent to C$1.0256 to the greenback on April 15 in its biggest one-day drop since Dec. 8, 2011.

Currency Bets

Futures traders increased to the highest level in more than six years their bets that the Canadian dollar will weaken against the U.S. currency, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 75,913 on April 16, the most since February 2007. The figure was 71,133 on April 12.

Canada’s 10-year government bonds rose for a third week, the longest stretch since November, pushing yields down three basis points, or 0.03 percentage point, to 1.71 percent. Yields touched 1.69 percent on April 17, the lowest since December. The price of the 1.5 percent security maturing in June 2023 gained 25 cents to C$98.07.

The Bank of Canada will auction C$3.3 billion ($3.2 billion) of 1.5 percent notes on April 24. The securities mature in August 2015.

Commodities Drop

Standard & Poor’s GSCI Index of 24 commodities fell 2.5 percent in its third weekly loss, reaching a nine-month low of 596.36 on April 18. Futures on crude oil, Canada’s largest export, declined 0.8 percent to $88.01 per barrel in New York and touched $85.61, the lowest level this year.

Raw materials including oil account for about half of Canada’s export revenue.

“We saw general decline in commodities across the board, particularly metals, earlier in the week,” Aaron Fennell, a futures specialist at Scotiabank’s ScotiaMcleod unit, said by phone from Toronto. “The biggest story was the gold decline, which sort of pushes the U.S. dollar higher, and the Canadian dollar would probably slide a little bit with gold. But we also saw declines in copper and aluminum and nickel and all the base metals we like to mine in Canada.”

Gold for immediate delivery slid 9.1 percent on April 15, the biggest daily drop since 1983, to $1,348.21 an ounce before ending the week at $1,403.79. It traded on April 1 at $1,599.52.

Copper futures lost 6 percent on the week, while nickel declined 4.3 percent. Aluminum fell 1.3 percent yesterday. Miners and energy explorers that account for 8 percent of the Canadian economy lost more than $21 billion of their value this week as stocks tumbled.

Export Obstacle

The central bank in its monetary policy report singled out the strong Canadian dollar as an obstacle for Canadian exporters. The strength was caused in part by the currency devaluation in other countries amid monetary stimulus, it said.

Global finance chiefs handed Japan leeway yesterday to reflate its stagnant economy by indicating its fresh round of monetary stimulus doesn’t contravene an agreement to avoid a currency war.

Meeting for the first time since the Bank of Japan (8301) unleashed new measures aimed at delivering 2 percent inflation within two years, Group of 20 finance ministers and central bankers said in Washington those actions are “intended to stop deflation and support domestic demand.” They echoed their promise of February that nations will refrain from “competitive devaluation” and avoid “persistent exchange-rate misalignments.”

The BOJ said April 4 it plans to purchase 7.5 trillion yen ($76 billion) of bonds a month in its effort to turn around 15 years of deflation.

‘Artificial Support’

“The Japanese are fundamentally devaluing their currency, and it’s part of the fundamental strategy, and to a lesser extent there’s somewhat of a race to the bottom,” said Mark Frey, chief market strategist at Cambridge Mercantile Group, a foreign-exchange and payments provider, by phone from Victoria, British Columbia. “It provides artificial support for the Canadian dollar at a time when the domestic economic situation is turning weaker.”

Retail sales in Canada slowed to 0.3 percent in February from 1 percent the previous month, which was the highest since September 2011, economists surveyed by Bloomberg forecast before Statistics Canada reports the data on April 23.

The Canadian currency fell 0.2 percent over the past month against nine developed-nation peers tracked by Bloomberg’s Correlation-Weighted Indexes. The yen slid 5 percent, Australia’s dollar lost 1.2 percent and the U.S. dollar declined 0.2 percent. The euro gained 1.3 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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