Canada’s dollar dropped against most of its major counterparts on concern tommorow’s two-day European Union summit will do little to stem the region’s sovereign-debt crisis.
The currency has tumbled this month against peers including the New Zealand and Australian dollars on speculation dimming prospects for global growth will prevent the Bank of Canada from raising interest rates. Statistics Canada reports April gross domestic product data on June 29.
“Everyone’s waiting for the summit,” John Curran, a senior vice president in Toronto at CanadianForex Ltd., an online foreign-exchange dealer, said in a telephone interview. “Any positive sentiment will be short-lived. The market is just waiting for confirmation. The Canadian dollar will underperform on general risk aversion, and on the growth slowdown.”
Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, dropped 0.1 percent to C$1.0249 per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys 97.57 U.S. cents.
The loonie gained 0.6 percent over the past week among 10 developed-nation currencies in Bloomberg Correlation Weighted Indexes, the fourth-best performance after the New Zealand dollar and yen, up 0.9 percent each, and the Australian dollar, which rose 0.6 percent.
Oil for August delivery gained 1.5 percent to $80.54 a barrel on the New York Mercantile Exchange. Prices have fallen 22 percent this quarter, the biggest drop since the final three months of 2008.
“We’ve seen oil prices come off quite a lot and the Canadian dollar is perceived as a commodity currency,” Jane Foley, a senior currency strategist at Rabobank International in London, said in a telephone interview. “It has underperformed the Aussie and New Zealand very significantly this month.”
Benchmark government 10-year notes yielded 1.72 percent, down two basis points, or 0.02 percentage point. Yields reached a record low 1.615 percent on June 1. The price of the 2.75 percent bonds due June 2022 rose 21 cents to C$109.37.
“I like the Canadian dollar,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, in a Bloomberg Television interview with Sara Eisen. “The Bank of Canada is talking about rate increases. It will hold steady, if there’s a bad summit outcome. Nowhere is absolutely safe, but that’s one of the safer places.”
Canada’s currency will strengthen to parity by the end of March, according to the median forecast in a Bloomberg News survey of 38 economists.
Speaking hours after Spanish Prime Minister Mariano Rajoy made a plea for help from tomorrow’s European summit, German Chancellor Angela Merkel shut the door to joint euro-bloc bonds as a means of lowering borrowing costs. Finance Minister Wolfgang Schaeuble later called for stronger fiscal discipline in the face of calls for growth.
“Investors are paring back foreign-exchange exposure ahead of the European Union summit meeting,” Shaun Osborne and Greg Moore, currency strategists at Toronto-Dominion Bank (TD) in Toronto, wrote in a note to clients today. “Market expectations appear to be suitably low-key for what will be the 19th summit meeting to be held in response to the euro-zone fiscal crisis. If 18 didn’t do it, there’s little chance that this one will alter much in the near-to-medium term.”
Implied volatility for one-month options on the Canadian dollar versus the greenback fell to almost the lowest level this month. It touched 7.85 percent today, after falling to the June low 7.8 percent last week. The 10-year average is 10 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.
Options traders are becoming less bearish on the Canadian dollar. 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, traded at 2.4 percentage points today, down from 3.2 percentage points at the end of May. It averaged 2 percentage points this year.
“Downside risks for the U.S. dollar-Canadian dollar exchange rate remain,” Osborne and Moore wrote, predicting the pair might slip below C$1.02 temporarily. “We still view U.S. dollar weakness as a buying opportunity, however, given what remains a less-than-supportive backdrop for risk assets.”
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