Canadian Currency Weakens as Risk Appetite Shrinks

Canada’s dollar fell from the strongest in two weeks against its U.S. counterpart as investor risk appetite shrank after the European Central Bank signaled concern the euro’s strength may hurt its 17-nation region.

The currency almost reached parity with the U.S. dollar for the first time in four days before a report tomorrow forecast to show Canada’s jobs growth slowed. Oil, the nation’s biggest export, fell after weaker U.S. economic data. The euro and the Australian and New Zealand dollars sank versus the greenback as ECB President Mario Draghi said the euro’s gains may hamper efforts to pull the currency bloc’s economy out of recession.

“Initially the euro was just moving in isolation and everything else looked very robust, and then more recently it’s spilled into Aussie-dollar weakness, kiwi weakness and Canada- dollar weakness,” Adam Cole, head of global currency strategy at Royal Bank of Canada, said by phone from London. “I don’t think it’s Canada-dollar-specific, but it’s rather the rest of the market being polluted by the move in euro.”

The loonie, as Canada’s currency is nicknamed for the image of the aquatic bird on the C$1 coin, weakened 0.2 percent to 99.79 cents per U.S. dollar at 5 p.m. The currency gained earlier to 99.33 cents, the strongest since Jan. 23. It last traded at parity with the greenback on Feb. 1. One Canadian dollar purchases $1.0021.

Lower Volatility

Implied volatility for three-month options on the U.S. dollar versus the loonie touched 5.98 percent, the lowest level since Jan. 24. Implied volatility signals the expected pace of currency swings and is quoted by traders to set option prices. It reached 6.85 percent on Jan. 28, the highest since Oct. 31.

Canada’s 10-year government bond ended the day little changed. The benchmark security’s yield traded at 1.99 percent after falling earlier to 1.98 percent as investors sought safety. The price of the 2.75 percent security due in June 2022 rose as much as 18 cents to C$106.57 before ending the day at C$106.40, up less than 1 cent.

The Canadian economy added 5,000 jobs in January, down from a revised 31,200 the month before, economists in a Bloomberg survey estimated before the government reports the figures tomorrow. The unemployment rate will rise to 7.2 percent from 7.1 percent, according to a separate survey.

“The big thing will be tomorrow’s employment data, so I think we’re going to stay in familiar ranges against the U.S. dollar until we see that data,” Matthew Perrier, director of foreign exchange at the Bank of Montreal, said in a telephone interview from Toronto. “If we see a little giveback of the strong employment gains of the last two months, we’ll probably see Canada weaken off.”

Currency Outlook

The loonie will trade between parity and 99.50 cents per U.S. dollar before the jobs data tomorrow, Perrier said.

It will end the first quarter at 99 cents per U.S. dollar and trade at 98 cents at year-end, according to the median estimate in a Bloomberg survey of 48 economists.

The Canadian dollar reached its strongest point in two weeks versus the euro after the ECB kept its benchmark interest rate at a record-low 0.75 percent and Draghi spoke to reporters.

The ECB chief said policy makers want to see if the euro’s rise “is sustained, and if it alters our assessment of the risks to price stability.” The shared currency has gained versus all of its 16 most-traded peers over the past six months.

The loonie climbed as much as 0.9 percent to C$1.3340 per euro today, the highest since Jan. 24.

Canada’s dollar has declined less than 0.1 percent this year against nine developed-nation peers monitored by the Bloomberg Correlation-Weighted Indexes. The greenback has gained 0.6 percent, and the euro has been the biggest winner, climbing 2.3 percent.

Stocks, Oil

U.S. stocks dropped after government reports showed employee output per hour in America decreased in the fourth quarter at a 2 percent annual rate, the worst performance in almost two years. U.S. jobless claims declined to 366,000 last week, versus a Bloomberg survey’s forecast of 360,000. The Standard & Poor’s 500 Index fell as much as 0.9 percent before paring the loss to 0.2 percent.

Crude oil for March delivery lost 0.7 percent to $95.95 per barrel in New York. It touched $95.04 yesterday, the lowest level since Jan. 23.

Standard & Poor’s GSCI Index of 24 commodities declined 0.3 percent. Raw materials including oil account almost half of Canada’s export revenue. Australia and New Zealand also export commodities. The Aussie was down 0.4 percent against the greenback today and New Zealand’s dollar, nicknamed the kiwi, lost 0.8 percent.

The loonie fell earlier against the greenback as Canadian building permits tumbled 11.2 percent in December, versus a Bloomberg survey’s forecast for a 5 percent increase.

“Those building-permits numbers were extremely poor,” John Curran, senior vice president at Canadianforex Ltd., an online foreign-exchange dealer, said by phone from Toronto. “But the real occurrence is going to be tomorrow’s employment data. That’s what everyone’s waiting on.”

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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

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