Canadian Dollar Falls as Oil Prices Drop on Iran Deal

The Canadian Dollar dropped to its lowest level in four months as the price of oil, Canada’s biggest export, fell after Iran and world powers reached an interim deal to set limits on its nuclear program.

The currency fell against the majority of its most-traded peers in the wake of the sixth-month agreement, which offers Iran about $7 billion in relief from sanctions in exchange for curbs on its nuclear program, while leaving in place banking and financial measures that have hampered its crude exports. World powers will continue negotiating for a more comprehensive deal to prevent Iran from developing nuclear weapons in exchange for ending sanctions.

“There’s a longer-term view being built in there that this is going to turn open the spigot for Iranian crude oil production which would obviously impact crude oil prices negatively,” said Mark Frey, chief market strategist at Cambridge Mercantile Group, a global foreign exchange and payments provider, by phone from Victoria. “In the short term, yeah I think oil is going to trade heavy, and I think it’s going to hurt the commodity currencies and I think you’re going to see that in the Canadian dollar.”

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, fell 0.3 percent to C$1.0543 per U.S. dollar at 5 p.m. in Toronto. The currency earlier touched C$1.0583 per U.S. dollar, the lowest since July 8. One loonie buys 94.85 U.S. cents.

Implied Volatility

The cost to insure against declines in the loonie against its U.S. counterpart touched the highest point in almost two weeks. The three-month so-called 25-delta risk-reversal rate rose to 1.3475 percent after earlier touching 1.375 percent, the highest since Oct. 15. 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 1.26 percent.

Implied volatility for three-month options on the U.S. dollar against its Canadian peer touched its highest point in almost 10 weeks. It reached 6.54 percent, the highest intraday level since Sept. 18. The measure is used to set option prices and gauge the expected pace of currency swings. The 2013 average is 6.69 percent.

Futures on crude oil fell 0.7 percent to $94.17 per barrel in New York trading.

“Canada, of course, has been overwhelmed by the drop in oil,” said Jane Foley, senior currency strategist at Rabobank International by phone from London. “That factor alone is enough to dampen the Canadian dollar, but in the medium term, if lower oil prices come through in better growth data that will be good for Canada, as well as everyone else.”

Iranian Agreement

Oil exports from the Islamic republic will be held to about 1 million barrels a day under sanctions that remain in force after Iran and six world powers reached an agreement yesterday in Geneva, according to the White House.

The agreement offers what President Barack Obama called targeted relief from sanctions, all of which can be imposed again if Iran doesn’t stick with its end of the bargain. It is intended as a first step to a comprehensive accord to be reached in six months to constrain Iran’s nuclear activities so that it can’t be used to make an atomic weapon, in exchange for a planned lifting of nuclear-related sanctions.

“They see that as maybe opening up the door to more ample global supplies of oil if we can see supplies from Iran eventually lifted,” said Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. “So that’s seen as a step in the right direction in terms of global supply, so that’s putting some downward pressure on oil.”

Canada’s benchmark 10-year government bonds rose, with yields falling two-basis points, or 0.02 percentage point, to 2.56 percent. The 1.5 percent security maturing in June 2023 added 15 cents to C$91.01.

The loonie has gained 1.3 percent in the last month against nine developed nation currencies tracked by the Bloomberg Correlation Weighted Index. The Australian dollar has had the biggest loss with a 2.7 percent drop while the U.S. dollar posted the biggest gains, rising 2.3 percent.

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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