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Canadian Dollar Drops on Speculation Leaders Won’t Solve Crisis

Canada’s dollar dropped versus its U.S. counterpart on concern European Union leaders meeting this week won’t succeed in stanching the region’s debt crisis, dimming the outlook for countries that export commodities.

The currency extended its 0.3 percent decline from last week, touching the lowest level in almost two weeks, as stocks and commodities including crude oil declined. The yen was the top performer among major currencies on demand for the most liquid of assets, and the greenback rose against most peers.

“The U.S. dollar is starting to pick up some momentum against the Canadian dollar from here,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD)’s TD Securities unit, in an interview in Bloomberg’s Toronto office. “We have commodity prices that look quite soft.”

Canada’s currency, nicknamed the loonie for the dollar coin’s waterbird image, depreciated 0.5 percent to C$1.0292 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0318, the weakest since June 12. One Canadian dollar buys 97.16 cents.

The loonie may weaken beyond C$1.0450, said Osborne.

Government bonds rose today, pulling the yield on Canada’s five-year security eight basis points, or 0.08 percentage point, lower to 1.23 percent. The price of the 1.5 percent securities maturing in March 2017 climbed 35 cents to C$101.24. Canadian five-year securities yielded 53 basis points more than their U.S. counterparts, compared with as much as 85 on April 27.

The MSCI All-Country World Index slid 1.4 percent, while the Standard & Poor’s 500 Index declined 1.6 percent. Crude futures dropped 0.9 percent to $79.10 a barrel in New York.

‘High Risk’

The Canadian dollar dropped 0.7 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, while the greenback fell 0.7 percent and the euro weakened 0.9 percent. The biggest loser was the pound, down 1.4 percent. New Zealand’s dollar was up 4.1 percent to lead gainers.

“The Canadian dollar wouldn’t be on top of my list of currencies to hold,” Derek Halpenny, European head of global currency-markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said in a telephone interview. “There’s a high risk of disorderly markets through the summer and into the autumn. We’re bullish U.S. dollar and yen.”

Canada has a current account deficit of 2.7 percent of gross domestic product, according to data compiled by Bloomberg. That’s the second-highest among Group of Seven and euro-area countries, the data show. Crude is Canada’s largest export.

Commodity Linkages

“On the negative side, you have linkages with commodities, and on top of that you have a current account deficit which is sizable enough,” said Bank of Tokyo-Mitsubishi’s Halpenny. “That could undermine the Canadian dollar. The evidence is pointing to slower U.S. growth.”

Citigroup Inc.’s Canadian terms of trade index fell to the lowest since October 2009 on June 21, compared with the firm’s New Zealand terms of trade index, which rose that day to the highest this year. The index measures the price of exports relative to imports. New Zealand is a net importer of oil and benefits when oil prices drop, according to Greg Anderson at Citigroup in New York.

“Shifts in the relative terms of trade have been generally correlated with movements in the New Zealand dollar-Canadian dollar exchange rate over the past couple of years,” Anderson, the North American head of Group-of-10 currency strategy at Citigroup, wrote in a note to clients today.

New Zealand’s dollar, known as the kiwi, traded at 81.02 cents versus the Canadian dollar today, up 4.1 percent this month.

“The magnitude of that bounce somewhat lags the terms of trade move,” Anderson wrote. The divergence “might potentially steer us towards the New Zealand dollar as we evaluate commodity-currency trade ideas over the next few weeks,” he wrote.

To contact the reporter on this story: Chris Fournier in Halifax at cfournier3@bloomberg.net

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

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