Canadian Dollar Drops as Crude Oil Reaches Lowest in Five Months

Canada’s dollar fell versus most major counterparts as futures of crude oil, the nation’s largest export, touched the lowest level in more than five months.

The currency dropped from yesterday’s one-week high versus the U.S. dollar before a report on Nov. 22 that’s forecast to show Canadian inflation fell in October. The Organization for Economic Cooperation and Development cut its global growth forecasts for this year and next. The discount Canadian oil producers face versus U.S. benchmark prices widened.

“Oil isn’t doing the Canadian dollar any favor,” said Adam Button, a currency analyst at forexlive.com, by phone from Montreal. “Canada will continue to sell oil at a big discount. It’ll pose a considerable headwind for the Canadian dollar.”

The loonie, as Canada’s currency is known for the image of the aquatic bird on the C$1 coin, slid 0.4 percent to C$1.0469 per U.S. dollar at 5 p.m. in Toronto. It gained to C$1.0415 yesterday, the strongest level since Nov. 7. One Canadian dollar buys 95.52 U.S. cents.

The currency fell versus all of its 16 most-traded peers tracked by Bloomberg except Mexico’s peso.

The cost to insure against declines in the loonie against its U.S. counterpart increased for the first time in three days. The three-month so-called 25-delta risk-reversal rate rose to 1.168 percent after earlier touching 1.055 percent, the lowest since Oct. 23. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite. The 2103 average is 1.27 percent.

Higher Volatility

Implied volatility for three-month options on the U.S. dollar against its Canadian peer also rose for the first time in three days. It reached 5.72 percent after falling earlier to 5.53 percent, the lowest intraday level since Oct. 23. The measure is used to set option prices and gauge the expected pace of currency swings. The 2013 average is 6.69 percent.

The OECD said in a semi-annual report the world economy will probably grow 2.7 percent this year and 3.6 percent next year, versus estimates in May of 3.1 percent and 4 percent.

Futures of crude oil sank as much as 0.6 percent to $92.43 per barrel in New York, the lowest level since June 4, before trading at $93.35, up 0.3 percent. The discount applied to the benchmark Western Canada Select crude oil grade versus its U.S. counterpart swelled to $37 a barrel after reaching a two-week low of $34.25 on Nov. 15.

Commodities Index

Standard & Poor’s GSCI Index (SPGSCI) of 24 commodities fell 0.4 percent to 611.7. It reached 604.6 on Nov. 7, the lowest on an intraday basis since June 24.

“It could be that the fall in commodities prices lately hasn’t been fully priced in the currency yet,” Greg T. Moore, a currency strategist at Toronto-Dominion Bank, said of the loonie in a phone interview from Toronto. “I still do think commodities prices will pull most of the weight in dollar-Canada.”

Canada’s government bonds dropped, pushing the yield on the benchmark 10-year security up three basis points, or 0.03 percentage point, to 2.56 percent. The price of the 1.5 percent debt maturing in June 2023 lost 27 cents to C$91.11.

The Bank of Canada will probably raise its benchmark lending rate at the end of next year to avoid a build-up of inflation, the OECD said in its world economic outlook.

The first increase in the 1 percent rate since 2010 is projected to be in the fourth quarter of 2014, with the central bank increasing it to 2.25 percent by the end of 2015, the Paris-based organization said in the report.

“With spare capacity narrowing by the end of 2015, monetary-policy tightening may need to begin by late 2014 to avoid a buildup of inflationary pressures,” it said.

Paring Wagers

Investors have been paring bets on higher borrowing costs after central-bank Governor Stephen Poloz on Oct. 23 unexpectedly dropped policy language in place for more than a year about the need to raise interest rates. He cited greater slack in the economy.

“They’re obviously seeing something no one else is seeing in the marketplace,” Dean Popplewell, head analyst at the online currency-trading firms Oanda Corp., said of the OECD forecast by phone from Toronto. “Growth is tenuous at best, and employment is even more suspect, and that’s not just in the U.S., that’s in North America and Europe.”

Consumer prices in Canada rose 0.8 percent in October from a year earlier, below the Bank of Canada’s 1 percent to 3 percent target band, economists surveyed by Bloomberg forecast before this week’s report. Prices gained 1.1 percent the previous month.

The Canadian dollar declined 1.4 percent over the past three months against nine other developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. Australia’s dollar rose 3.8 percent, while the U.S. dollar fell 0.7 percent.

U.S. Stimulus

The greenback slid today against 11 of its 16 most-traded peers amid concern more Federal Reserve policy makers including Chairman Ben S. Bernanke may say economic growth in America, Canada’s biggest trade partner, isn’t strong enough to reduce monetary stimulus. The Fed’s $85 billion in bond purchases have fueled risk appetite worldwide while tending to debase the U.S. currency.

Bernanke is scheduled to speak to the National Economists Club in Washington at 7 p.m.

Vice Chairman Janet Yellen told U.S. lawmakers Nov. 14 at a hearing on her nomination to run the central bank that the American economy and labor market are performing “far short of their potential.” She said she’s committed to promoting a strong recovery and will ensure that the stimulus isn’t removed too soon.

To contact the reporters on this story: Andrea Wong in New York at awong268@bloomberg.net; 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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