Canada Dollar Gains for Eight Week Versus Euro on Europe Debt Concern

The Canadian dollar advanced for an eighth consecutive week versus the euro, the longest streak since 2007, as investors sought the assets of countries with relatively healthy balance sheets amid Europe’s debt crisis.

The currency trimmed its weekly advance against the U.S. dollar after Standard & Poor’s cut the AAA ratings of France and Italy yesterday, potentially reducing the effectiveness of the euro-region’s bailout fund to finance aid for Greece, Ireland and Portugal. The Bank of Canada meets Jan. 17 to determine interest rates.

“The Canadian dollar and other currencies have been doing well versus the euro, that’s the real story,” said Philippe Denolf, a currency trader in Montreal at Laurentian Bank of Canada.

Canada’s currency climbed 0.5 percent this week to C$1.0232 per U.S. dollar in Toronto. It touched C$1.0319 on Jan. 9, the weakest level since Dec. 20. One Canadian dollar buys 97.73 U.S. cents. The currency ended the week at C$1.2974 per euro. It touched C$1.2908 on Jan. 11, the strongest since January 2010.

The Canadian dollar may depreciate to C$1.0860 after it breaks out of its range of between C$1.000 to C$1.0350, Denolf said.

Bearish Bets

Futures traders increased their bets the Canadian dollar will decline against the greenback, 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 28,649 on Jan. 10, compared with net shorts of 23,371 a week earlier.

Canadian government bonds rose this week, driving benchmark 10-year yields down one basis point to 1.92 percent. The 3.25 percent securities due in June 2021 rose 8 cents to C$111.33.

The spread difference between two- and 10-year government bonds narrowed to 96 basis points yesterday, the least since September 2008. A flatter yield curve generally indicates a worsening economic outlook.

S&P cut France’s AAA credit rating to AA+ with a negative outlook, the company said in a statement. Cyprus, Italy, Portugal, and Spain were cut by two levels S&P said. Germany, Belgium, Estonia, Finland, Ireland, Luxembourg and the Netherlands had their ratings affirmed.

‘Well-Defined Downtrend’

“We’ve seen a pretty well-defined downtrend” in euro- Canada,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, in a telephone interview. “We’ve pretty much moved in a straight line decline from C$1.40 to C$1.30. It’s going to take quite a bit to turn things around.”

Canada reported an unexpected surplus as exports of energy and automobiles rose while imports fell. Statistics Canada said yesterday the nation ran a surplus of C$1.07 billion ($1.05 billion) while the October deficit was revised to C$487 million from C$885 million. Economists surveyed by Bloomberg forecast a C$500 million deficit, based on the median of 19 responses.

The trade report is the last major piece of economic data before the central bank’s Jan. 17 interest-rate decision. Governor Mark Carney will probably keep the policy interest rate at 1 percent, where it’s been since September 2010, according to economists surveyed by Bloomberg.

Rates Outlook

“Uncertainties regarding policies and spillover risks from Europe should keep Canadian rates low in the first half of 2012,” Alex Li, an analyst at Deutsche Bank AG, wrote in a note to clients yesterday. “Although Canada’s economic prospects appear to be brightening largely due to an improved flow of U.S. economic data, there is still considerable uncertainty regarding both the external and domestic economic outlook.”

The central bank will hold rates at 1 percent until the first quarter of 2013, when it will raise them by a quarter percentage point, according to the median of 24 forecasts compiled by Bloomberg. The nation’s economy will expand at a 2 percent pace this year, from 2.3 percent last year, a separate survey said.

Trading in overnight index swaps indicates a 50 percent probability of a quarter-percentage point interest rate cut by the central bank’s Sept. 5 meeting, according to Bloomberg calculations as of yesterday. Swaps show only a 6 percent chance of a cut at next week’s meeting, rising to about a 25 percent chance in April.

Currency Volatility

Implied volatility for one-month options on the Canadian dollar versus the greenback fell to as low as 8.9 percent yesterday from 11 percent at year-end. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

Options traders are becoming less bearish. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against the loonie versus contracts to sell, fell Jan. 11 to 1.44 percentage points, the lowest since August, from 2.27 percentage points at the end of last week.

The loonie has weakened 4 percent in the past year, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The U.S. dollar has lost 0.9 percent and the euro has fallen 2.2 percent.

To contact the reporter on this story: 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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