Canada’s Dollar Declines as Cyprus Turmoil Curbs Risk Appetite

Canada’s dollar fell for the sixth week in seven versus its U.S. peer as concern Cyprus won’t reach a deal to avoid financial collapse and prevent contagion from infecting the euro region damped risk appetite.

The currency declined after Canadian factory sales fell in January more than expected, suggesting the nation’s economic recovery may have stalled. The so-called loonie pared losses as Finance Minister Jim Flaherty said he plans to eliminate the country’s deficit before the next election in 2015 and the U.S. Federal Reserve maintained stimulus measures to support growth. Canada’s economy grew in January after contracting the prior month, a report is forecast to show next week.

“In the short term, there is some risk aversion from Cyprus,” Camilla Sutton, chief currency strategist at the Bank of Nova Scotia, said by telephone yesterday. “Once we get through this weekend, and if a solution emerges, then maybe there will be a change in risk appetite.”

The loonie, as Canada’s dollar is nicknamed for the image of the aquatic bird on the C$1 coin, depreciated 0.4 percent to C$1.0232 per U.S. dollar this week in Toronto. One Canadian dollar buys 97.73 U.S. cents.

Bonds Gain

Canada’s benchmark 10-year government bond rose for a second week, with yields falling eight basis points, or 0.08 percentage point, to 1.82 percent. The 2.75 percent security that matures in June 2022 gained 65 cents to $107.85.

The Bank of Canada auctioned C$3.3 billion ($3.2 billion) worth of two-year government notes on March 20 at an average yield of 0.985 percent, lower than the 1.168 percent yield from the Feb. 13 auction of two-year notes. The offering drew C$8.62 billion in bids.

Future traders increased their bets that the Canadian dollar will decline against the U.S. dollar to the highest level since March 2007, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 65,331 on March 19, compared with net shorts of 53,397 a week earlier.

Cyprus Talks

The Canadian dollar weakened as European and Cypriot officials were locked in talks to find a formula to avert the Mediterranean island’s financial collapse, struggling to forge consensus on a bailout package before the European Central Bank cuts funding.

Cyprus’s House of Representatives late Friday approved the passage of legislation to allow capital controls and to create a “solidarity” investment fund, part of an attempt to secure financial support from the euro area and International Monetary Fund. Legislators were debating another seven laws, including one to reorganize the nation’s banks.

Futures on crude oil, Canada’s largest export, gained 0.4 percent in New York this week to $93.80 a barrel. Western Canada Select, the benchmark for oil-sands bitumen, traded a discount of $16.50 to U.S. West Texas Intermediate price, the lowest since Oct. 17. The discount has fallen from $42.50 on Dec. 14.

“Canada is still grabbing a larger market share of U.S. oil market, despite the U.S. oil boom,” David Watt, chief economist at HSBC Bank Canada in Toronto, said by phone. “That is a very good story for Canada, at least in terms of oil volume.”

Canadian oil exports to the U.S. rose in 2012 even as the world’s largest economy imported the lowest amount of crude oil last year in any year since 1997, according to a government report released March 20. Imports from Canada have gone up since 2005 compared to fewer imports from Saudi Arabia, Mexico and Venezuela, the U.S. Energy Information Administration said.

‘Negative Number’

The loonie declined as Canada’s factory sales dropped last month for the fourth time in five months, led by declines in automobiles and aircraft. Sales fell 0.2 percent to C$48 billion ($46.9 billion), Statistics Canada said in Ottawa. None of the 20 economists surveyed by Bloomberg forecast a decline, and their median estimate was for a 0.6 percent gain.

“A little bit of a negative number for Canada,” Don Mikolich, executive director of foreign exchange sales at Canadian Imperial Bank of Commerce, said by phone from Toronto on March 19. “Without that positive reinforcement over this week and next, I think Canada will test the upper limit ends of the boundaries.”

Mikolich said the loonie could weaken to C$1.03 per U.S. dollar in the next two weeks.

Budget Surplus

Gross domestic product in Canada expanded 0.1 percent in January after contracting 0.2 percent the previous month, according to the median estimate in a Bloomberg survey of 18 economists before the report is released on March 28.

Canadian Finance Minister Flaherty’s budget projected Canada will swing to a surplus of about C$800 million ($781 billion) in the fiscal year that begins April 2015, from a C$25.9 billion deficit in the year ending this month.

The Fed led by Chairman Ben S. Bernanke said it would keep buying $85 billion of bonds each month to cap borrowing costs while holding its target interest rate near zero as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent.

The loonie has fallen 2.6 percent in the past six months against nine developed nation peers tracked by the Bloomberg Correlation Weighted Indexes. The U.S is up 2.6 percent the euro gained 2.7 percent.

To contact the reporter on this story: Taylor Tepper in New York at ttepper2@bloomberg.net

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

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