Canadian Dollar Declines for Second Day as China Derails Investor Optimism

Canada’s dollar weakened versus its U.S. counterpart for a second day and fell against a majority of its most-traded counterparts after China lowered its growth forecast, crimping demand for higher-risk assets.

The currency touched the lowest level in almost a week versus the greenback and dropped for the first time in five days versus the yen. Canada’s central bank meets on March 8 to determine interest rates, with all 25 economists in a Bloomberg survey predicting no change from 1 percent. Crude oil gained and stocks fell.

“The Canadian dollar is reacting to China’s news,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia (BNS) in Toronto. “The broad theme of central-bank liquidity and extraordinarily low volatility seems to be leaving us with very quiet markets.”

Canada’s dollar, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, depreciated 0.5 percent to 99.46 cents per U.S. dollar at 5 p.m. in Toronto. It touched 99.60 cents, the weakest level since Feb. 28. One Canadian dollar purchases $1.0053.

Sutton cited 10 central-bank meetings, the Greek bond swap and dual U.S. and Canadian employment numbers as events that may drive markets this week.

Low Volatility

Implied volatility for one-month options on Canada’s dollar versus the greenback increased from the lowest level in almost five years. It touched 7.65 percent today after reaching 6.90 percent on Feb. 24, the least on an intraday basis since June 2007. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency. The five-year average is 12 percent.

Canadian employers added 15,000 positions to payrolls last month, after increasing them by 2,300 in January, according to the median of 23 forecasts compiled by Bloomberg. Statistics Canada releases the data on March 9 in Ottawa.

The Bank of Canada will leave its benchmark interest rate at 1 percent, where it’s stood for more than a year, until the first quarter of 2013, according to the weighted average of 20 responses in a Bloomberg survey.

The Canadian currency on March 2 capped its strongest weekly gain since January on speculation officials are containing Europe’s debt crisis and as U.S. economic indicators improve, bolstering optimism that quickening global growth will raise demand for Canadian exports such as oil and copper.

China Paring

Government bonds were little changed, with benchmark 10- year (GCAN10YR) yields at 1.97 percent after falling six basis points, or 0.06 percentage point, last week.

Two-year yields traded at 1.11 percent after rising three basis points last week.

China pared its economic growth target to 7.5 percent from an 8 percent goal in place since 2005, a signal that leaders are determined to cut reliance on exports and capital spending in favor of consumption.

Officials will aim for inflation of about 4 percent this year, unchanged from the 2011 goal, according to Premier Wen Jiabao’s state-of-the-nation speech, delivered at the annual meeting of the National People’s Congress in Beijing.

“We were a bit risk-averse going into the weekend; the China slowdown has added to that,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “The Canadian dollar will perform much in line with risk hesitation. I’m optimistic medium-term, but I think all of these moves have run out of steam a little bit,” he said, referring to recent gains in commodity-linked currencies.

The Standard & Poor’s 500 Index fell 0.4 percent, and the MSCI World Index of stocks dropped 0.5 percent. Crude oil gained 0.6 percent.

Gained Last Week

The Canadian currency outperformed 14 of its 16 most-traded counterparts last week as the price of crude oil, the country’s biggest export, touched the highest level since 2008. Jobless- insurance claims fell and consumer confidence rose in the U.S., the nation’s biggest trade partner.

The Canadian currency ended March 1 at 98.55 cents, the lowest closing price since Sept. 16.

“The daily close below 98.83 cents has reaffirmed the bearish backdrop for the U.S. dollar versus the Canadian dollar,” George Davis, chief technical analyst for fixed income and currency strategy at Royal Bank of Canada in Toronto, wrote in a note to clients today. “Prices have returned above this level as the risk backdrop adopts a more cautious tone to begin the week. Prices will have to close above C$1.0151 in order to signal a more material price correction is getting under way.”

Canadian Finance Minister Jim Flaherty said his plan to return the country’s finances to balance in coming years is on schedule, giving the government scope to reduce taxes and pay down debt, potentially increasing the attractiveness of the nation’s currency.

Speaking to reporters after meeting with private-sector economists in Ottawa today ahead of his March 29 budget, Flaherty said there is more optimism about the U.S. economy since his last fiscal update in November, even though Europe remains a concern.

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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