Canadian Currency Drops to Two-Week Low as Investors' Risk Appetite Fades

Canada’s dollar fell to a two-week low versus the greenback as concern Europe’s debt crisis will broaden damped investors’ risk appetite and U.S. Treasury yields near seven-month highs made the U.S. currency more attractive.

The Canadian currency lost for the second straight week versus its U.S. counterpart, which rose today versus most major peers including the euro and the Australian dollar as Ireland’s credit rating was cut five levels. Canadian Imperial Bank of Commerce suggested policy makers consider selling Canadian dollars to curb longer-term gains in the currency.

“Problems in Ireland, with the downgrade this morning, have provided the stimulus for a move toward risk aversion and buying U.S. dollars for Treasuries as a safe haven,” said Darren Richardson, senior corporate dealer in Toronto at CanadianForex Ltd., an online foreign-exchange dealer. “Canada, the Aussie and the euro have all taken hits.”

Canada’s currency, nicknamed the loonie, slid 0.8 percent to C$1.0140 per U.S. dollar at 5 p.m. in Toronto, from C$1.0061 yesterday. It touched C$1.0147, the weakest level since Dec. 2. The currency, which fell 0.5 percent for the week, reached C$1.0001 on Dec. 15, the strongest level since it last traded at parity with the greenback on Nov. 11. One Canadian dollar buys 98.62 U.S. cents.

The Canadian currency “ran into very good selling interest in the C$1.01 area,” Shaun Osborne, Toronto-based chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, wrote in an e-mail.

Gain for Year

The loonie gained 4.4 percent over the past year in a measure of 10 developed-nation currencies, Bloomberg Correlation-Weighted Currency Indexes showed. The Australian dollar climbed 11 percent, while the greenback fell 1.8 percent and the euro tumbled 10 percent.

Bank of Canada Governor Mark Carney may want to consider selling Canadian dollars as an option to temper gains in the currency driven by purchases by other central banks, Avery Shenfeld, chief economist at CIBC, wrote in a report today.

The loonie’s strength undermines Carney’s ability to raise interest rates to slow increasing household debt levels, Shenfeld said in the report. Further gains in the currency may slow growth, he said.

“There is one weapon yet to be touched: fighting fire with fire,” Shenfeld wrote. “Canada could match foreign central- bank intervention in favor of our currency with an offsetting intervention, selling an equivalent volume of loonies.”

The call for the Bank of Canada to intervene “could have some impact in thin markets,” David Watt, senior currency strategist in Toronto at Royal Bank of Canada’s RBC Capital Markets, wrote in an e-mail.

‘Rather Modest’

“However, the Canadian-dollar moves have been rather modest of late, and its performance over the last 24 hours is consistent with the Australian dollar and the New Zealand dollar, so it might just be that we had some overnight catch- up,” Watt wrote.

Canadian government bonds rose, pushing yields on the benchmark 10-year note down eight basis points, or 0.08 percentage point, to 3.19 percent. They touched 3.16 percent, the lowest level since Dec. 7. The price of the 3.5 percent security due in June 2020 increased 65 cents to C$102.54.

Stocks and crude oil, Canada’s biggest export, fluctuated. The Dow Jones Industrial Average was little changed after falling 0.4 percent. Crude for January delivery fell as much as 0.8 percent to $87.01 a barrel in New York before trading at $88.02. It touched $86.83 on Dec. 15, the lowest since Dec. 2.

Seven-Month High

Treasury 10-year yields traded at 3.33 percent, after reaching 3.56 percent yesterday, the highest level since May 13. They closed at 2.80 percent on Nov. 30.

Currencies of growth-linked nations including Canada, New Zealand and Australia fell versus the greenback today on concern a European Union summit didn’t produce enough to keep sovereign- debt problems from spreading in the region. While EU leaders agreed to amend the bloc’s treaties to create a permanent debt- crisis mechanism in 2013, they struggled to bridge divisions over immediate steps to stabilize bond markets.

Moody’s Investors Service downgraded Ireland’s credit rating to Baa1 today from Aa2 after the government was forced to ask for external aid last month, staggered by losses in the country’s banking system. The new rating is just three level above non-investment grade.

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Chris Fournier in Montreal at cfournier3@bloomberg.net

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

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