Canada’s Dollar Weakens From One-Month High on Renewal of Risk Aversion

Canada’s dollar declined from the strongest level in a month as renewed concern Europe’s sovereign debt crisis will worsen spurred an increase in risk aversion among investors.

Canada’s currency has been the fourth-best performer after the U.S. dollar, yen and pound over the past three months against the euro among the most-traded currencies, gaining 2.4 percent, as investors sought refuge from the prospect of a global recession. The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, according to three euro-area officials.

“We had a big move yesterday, but there is a more cautious tone in the market overall and the risk backdrop is leaning against the Canadian dollar,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital Markets unit in Toronto. Investors are “waiting to see what comes out of the European summit tomorrow to give the market direction.”

Canada’s currency rose as much as 0.3 percent to C$1.0066 per U.S. dollar, the strongest since Nov. 3, before trading little changed at C$1.0099 at 5:15 p.m. in Toronto. One Canadian dollar buys 99.07 U.S. cents.

Crude oil, the nation’s largest export, retreated as the dollar gained against the euro after a German government official said Chancellor Angela Merkel’s government is more pessimistic on the outcome of a European Union leaders’ summit in Brussels beginning tomorrow.

Crude for January delivery on the New York Mercantile Exchange fell 0.6 percent to $100.55 a barrel.

Additional Options

The ECB will reduce its benchmark rate to 1 percent from 1.25 percent tomorrow, according to the median estimate of economists surveyed by Bloomberg News.

Additional options that the central bank is considering include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest-rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.

Canada’s currency rose yesterday after the central bank kept its main interest rate unchanged at 1 percent.

Europe Watch

“The market is still very uncertain that a deal can be reached with anything concrete in it, which leaves a lot of unanswered questions and what if to worry about,” said Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia’s Scotia Capital unit. “The loonie has had a good run after the Bank of Canada was more balanced that the market was expecting, but there is still a lot of event risk to deal with from here with the European meetings ahead.”

Swaps traders trimmed bets the Bank of Canada will cut interest rates by the middle of next year on signs the domestic and U.S. economies will weather the European sovereign-debt crisis.

The Federal Reserve, Bank of Canada and other central banks reduced the cost of emergency dollar funding last week in a coordinated action to help prevent the spread of debt contagion in Europe. The interest rate was reduced to the dollar overnight index swap rate plus 50 basis points, or a half- percentage point, from 100 basis points, and the program was extended to February 2013.

“While markets have taken comfort from the coordinated central bank announcement last week, the risk remains a disappointing outcome this weekend as implementation of any possible agreements will take time & belt tightening,” John Curran, senior vice president at the online dealer CanadianForex Ltd., wrote in a note to clients. “Look for risk aversion & a stronger U.S. dollar to creep into” Canadian dollar market action, he said.

Yields on the six-month overnight index swap, a security based on what investors expect the central bank’s rate will average during that period, climbed as much as 2.6 basis points, or 0.026 percentage point, yesterday in the biggest intraday increase in three weeks.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Chris Fournier in Halifax, Nova Scotia at cfournier3@bloomberg.net

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

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