Canada Dollar Falls as Syria Bets Bolster U.S. Currency’s Appeal

The Canadian currency weakened as speculation America and its allies will take military action against Syria boosted the U.S. dollar’s appeal as a haven.

Canada’s dollar rallied earlier versus most major peers as crude oil, the country’s largest export, touched its highest level in more than two years amid bets military operations may disrupt Middle East oil supplies. The loonie, as the currency is called, declined against the greenback before data this week forecast to show the U.S. economy expanded in the second quarter while Canada’s contracted in June.

“There is a general bid tone in the market for the U.S. dollar on the back of the Syria crisis,” said David Bradley, director of foreign-exchange trading at Bank of Nova Scotia (BNS)’s Scotia Capital unit in Toronto. “It is also creating an environment for higher gold and higher crude, which is Canadian-dollar positive. Dollar-Canada is trading within recent ranges.”

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, depreciated as much as 0.4 percent, the most compared with closing prices since Aug. 22, to C$1.0511 per U.S. dollar before trading at C$1.0487 at 5 p.m. in Toronto, down 0.1 percent. One Canadian dollar buys 95.36 U.S. cents.

Canadian government bonds fell for the first time in five days, pushing the yield on the benchmark 10-year security up from a two-week low of 2.56 percent reached yesterday. The yield increased six basis points, or 0.06 percentage point, to 2.62 percent. The price of the 1.5 percent debt due in June 2023 dropped 48 cents to C$90.42.

Bond Auction

The Bank of Canada auctioned C$3.4 billion ($3.2 billion) of five-year bonds at an average yield of 1.957 percent. The 1.25 percent securities due in September 2018 drew C$8.9 billion in bids, for a bid-to-cover ratio, a gauge of demand, of 2.62.

At the last five-year bond auction, on July 10, the central bank sold C$3.4 billion of the securities at an average yield of 1.884 percent and a coverage ratio of 2.52.

The Canadian dollar gained 0.2 percent over the past week against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. Australia’s dollar lost 0.9 percent, and the New Zealand dollar dropped 0.5 percent. The U.S. currency was little changed.

Implied volatility for three-month options on Canada’s dollar versus its U.S. counterpart slipped to 7.75 percent after touching 7.97 percent yesterday, the highest intraday level since July 17. The measure is used to set option prices and gauge the expected pace of currency swings. The average for this year is 6.8 percent.

Crude Oil

Futures for West Texas Intermediate crude climbed as much as 3 percent to $112.24 a barrel in New York, the highest level since May 2011, before trading at $109.52, up 0.5 percent. Brent crude rallied as much as 2.6 percent to $117.34 a barrel.

A U.S.-led strike on Syria in retaliation for the alleged use of chemical weapons in its civil war is probable within the next week, raising the possibility Brent may hit $150 should a widening conflict halt oil output in Iraq or other producers, according to Societe Generale SA.

“There is a chain of impact that would cause crude-oil prices to rise, and an adjunct impact of that would be some strength in the Canadian dollar,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada (NA), by phone from Toronto. “I see the geopolitics as having a temporary impact on financial markets, from having a flight-to-quality perspective, risk-aversion metrics, and of course commodity-price rises.”

Standard & Poor’s GSCI Index (SPGSCI) of 24 raw materials increased 0.9 percent. Gold for immediate delivery jumped as much as 1.3 percent to $1,433.73 an ounce before trading at $1,417.51, up 0.2 percent.

Greenback Gains

The Bloomberg Dollar Index, which tracks the greenback against 10 major counterparts, rose 0.4 percent to 1,028.68.

U.S. gross domestic product increased an annualized 2.2 percent in the second quarter, more than the 1.7 percent previously estimated, a Bloomberg survey of economists forecast that a government report tomorrow will show.

Canada’s GDP (CAGDPMOM) shrank 0.4 percent in June, a separate Bloomberg survey estimated before a report due Aug. 30. The nation’s economy expanded 1.6 percent in the second quarter, after growing 2.5 percent from January through March, economists projected.

The Bank of Canada meets Sept. 4. The central bank has maintained its benchmark overnight rate target at 1 percent since September 2010 to support the economy.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

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