Canada Dollar Reaches Two-Week Low as Europe Debt Trims Demand

Canada’s dollar reached the lowest level against its U.S. counterpart in almost two weeks as concern Europe’s debt crisis is worsening crimped demand for riskier assets.

The currency advanced briefly after a report showed retail sales rose in May after dropping in April. Volatility rose for a third session and options traders increased the amount they’re paying for protection against a weaker Canadian dollar.

“The European situation is just getting started,” Aaron Fennell, a futures specialist at Scotiabank’s ScotiaMcLeod unit, said by phone from Toronto. “Markets will start to hang more and more on the U.S. election in November. I don’t anticipate we’ll go through parity in a convincing way before the end of the year.”

Canada’s currency, nicknamed the loonie, gained 0.3 percent to C$1.0221 per U.S. dollar at 5 p.m. in Toronto, reaching the weakest level since July 12. One Canadian dollar buys 97.83 cents.

Implied volatility for one-month options on the Canadian dollar versus the greenback increased for a third day, rising to 7.47 percent, after falling to 6.22 percent at the end of last week, the lowest this year. The five-year average is 12 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Options Data

So-called risk reversals show options traders are paying more this week for protection against loonie weakness. The premium for the right to buy the U.S. currency against the loonie in three months, compared to the right to sell it, rose to 1.47 percentage points today, up from this year’s low of 0.99 percentage points on July 20.

“Globally, we’re seeing risk appetite being challenged, but in the euro zone it’s even more intense,” Ian Stannard, head of European currency strategy at Morgan Stanley in London, said in a telephone interview. “We expect the commodity currencies to come under pressure from signs of a global growth slowdown.”

Government bonds rose, pushing 10-year yield down one basis point, or 0.01 percentage point, to 1.58 percent. It touched 1.565 percent yesterday, the lowest yield since 1950, according to Bank of Canada and Bloomberg data.

The 2.75 percent security maturing in June 2022 gained six cents to C$110.72.

Debt Sale

Canada will sell C$2.6 billion of 10-year bonds tomorrow. The securities mature in June 2023. The previous auction of 10- year bonds, on June 6, drew an average yield of 1.765 percent and a bid-to-cover ratio -- the amount bid relative to the amount offered -- of 2.37 times, according to Bank of Canada data. The five-auction average ratio is 2.43 times.

Odds that the Bank of Canada will cut interest rates by the end of the year rose to about 33 percent today, from 24 percent at the end of last week, according to data compiled by Bloomberg.

“It comes down to interest rates,” said ScotiaMcLeod’s Fennell. “As soon as they start raising rates, even if they just talked about it, that would get the CAD moving. But that doesn’t seem to be the situation now.”

Bank of Canada Governor Mark Carney has said since April that tightening rates may become warranted, putting him at odds with counterparts in Europe, the U.S., China and Japan who have been adding stimulus. Carney reiterated his stance in the statement accompanying the Ottawa-based central bank’s July 17 decision to leave its target overnight rate at 1 percent.

Consumer Spending

Retail sales rose less than economists forecast in May as lower spending on gasoline partly offset gains at food and clothing stores, government figures showed. Sales increased 0.3 percent to C$38.9 billion ($38.2 billion), Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News forecast a 0.5 percent increase, based on the median of 25 projections.

The euro fell for a fifth day against the yen, the longest losing streak since May, amid speculation Europe’s sovereign- debt crisis is threatening to engulf Spain and Italy. Moody’s Investors Service cut its ratings outlook yesterday for Germany and the Netherlands and LCH Clearnet Ltd. raised the extra deposit it demands to trade some Spanish and Italian bonds.

“We’re still looking for fairly sharp losses in euro generally in the near term,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD)’s TD Securities unit, said in an e-mail. “Seasonally, this is not a pro-risk time of year, so I would expect the commodity currencies to struggle versus the U.S. dollar and for the yen to gain.”

The Canadian dollar has gained 2.2 percent this year against its nine counterparts, according to Bloomberg Correlation-Weighted Indexes. The U.S. dollar has risen 2.3 percent and the euro is down 5.6 percent.

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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