Canadian Dollar Falls for Second Week as Investors Lose Appetite for Risk
Canada’s dollar dropped for a second week against the greenback as investors turned to the perceived safety of U.S. government debt on concern Europe’s sovereign- debt crisis will deepen.
The currency, nicknamed the loonie for the image of the bird on the C$1 coin, retreated from a one-month high as investors’ risk appetite ebbed and stocks and crude oil pared advances. The allure of U.S. assets was also burnished as Treasury yields rose to seven-month highs. Data next week may show gains slowed in Canadian consumer prices and retail sales.
“The positive equity and commodity story was winning out at the beginning of the week, but in the second half the issues in Europe and the risk aversion overwhelmed it,” said George Davis, chief technical analyst for fixed income and currency strategy at Royal Bank of Canada’s RBC Dominion Securities in Toronto. “Europe has created a bid tone for the U.S. dollar and so dollar-Canada.”
The Canadian currency weakened 0.5 percent to C$1.0140 per U.S. dollar yesterday in New York, from C$1.0091 on Dec. 10. It touched C$1.0001 on Dec. 15, the strongest level since it last traded on a one-for one basis with the greenback on Nov. 11. One Canadian dollar buys 98.62 U.S. cents.
Canadian government bonds rose, pushing the benchmark 10- year note’s yield down 12 basis points to 3.19 percent, from 3.30 percent on Dec. 10. A basis point is 0.01 percentage point. The yield touched 3.37 percent Dec. 14, the highest since June 21. The price of the 3.5 percent security due in June 2020 gained 95 cents to C$102.55.
Two-Week Low
The loonie depreciated to a two-week low yesterday, C$1.0147, as an agreement by European Union leaders at a two-day summit in Brussels failed to allay concern the debt crisis will spread from Greece and Ireland to other nations in the region.
Moody’s Investors Service downgraded Ireland’s credit rating to Baa1 yesterday 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, three levels above non-investment grade, is the same one carried by countries that include Russia and Lithuania.
The EU leaders agreed to amend the bloc’s treaties to create a permanent crisis-management mechanism in 2013. Divisions flared over steps to prevent the debt crisis from engulfing Portugal and Spain.
“It’s good there is a mechanism, but on the other hand it’s in 2013 so there’s a lot of it being discounted from the market,” said C.J. Gavsie, managing director for foreign- exchange trading in Toronto at Bank of Montreal’s BMO Capital Markets.
For now, Germany ruled out topping up the current 750 billion-euro ($1 trillion) emergency fund or rushing aid to Portugal or Spain, reinforcing skepticism in markets.
U.S. Yields Surge
The greenback rose against most major counterparts this week as benchmark Treasury 10-year yields surged, touching 3.56 percent on Dec. 16, the highest level since May 13. Prices of U.S. government securities fell as the Federal Reserve said Dec. 14 the U.S. economic recovery is continuing and Congress passed an $858 billion bill extending Bush-era tax cuts for two years. President Barack Obama signed the measure into law yesterday.
Crude oil, Canada’s biggest export, trimmed an advance. January futures fell as low as $87.01 a barrel in New York yesterday after rising to $90.76 a barrel on Dec. 7, the highest level since October 2008. The Standard & Poor’s/Toronto Stock Exchange Composite Index fell 0.3 percent for the past five days, the first loss in three weeks.
Gain for Year
The Canadian dollar gained 4.4 percent over the past year in a measure of 10 developed-nation currencies, Bloomberg Correlation-Weighted Currency Indexes showed. The U.S. dollar fell 1.8 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 Canadian Imperial Bank of Commerce, wrote in a report yesterday.
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.”
Consumer prices rose last month at an annual pace of 2.2 percent, compared with a 2.4 percent pace in October, according to the median forecast in a Bloomberg News survey of 17 economists before Statistics Canada released the data Dec. 21.
Retail sales rose 0.5 percent in October, after increasing 0.6 percent the previous month, according to a separate Bloomberg survey. Sales haven’t declined since May. The nation’s statistics agency will report the data on Dec. 21.
To contact the reporter 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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