Canada’s Dollar Declines as Euphoria of Europe Debt Deal Wanes

Canada’s dollar weakened after rising yesterday to the highest level in more than a month as optimism that Europe’s debt crisis is contained faded, damping demand for riskier assets.

The Canadian currency posted its fourth straight weekly advance against the greenback, which has lost value against all of its 16 major counterparts since Oct. 21. The Canadian dollar is the fourth-worst performing major after the Bank of Canada cut its growth outlook this week. Canada’s dollar capped the biggest two-day gain yesterday since May 2010 after European leaders announced a plan to stave off a Greek default and safeguard banks.

“On a short-term basis, the move has been overdone,” said Philippe Denolf, a currency trader in Montreal at Laurentian Bank of Canada, referring to the 4 percent appreciation of the Canadian dollar this month. “Positioning was such that any good news this week lit a fire under the market. The market was not positioned for good news and it blew up in the bears’ faces.”

Canada’s currency declined 0.1 percent to 99.17 cents per U.S. dollar at 5 p.m. in Toronto. It touched 98.92 cents yesterday, the strongest level since Sept. 20. One Canadian dollar buys $1.0084.

The Standard & Poor’s 500 Index was little changed and futures on crude oil, the nation’s largest export, declined 0.5 percent to $93.48 a barrel in New York.

Bonds Rise

Canadian government bonds rose, pulling 10-year benchmark yields down six basis points, or 0.06 percentage point, to 2.43 percent. The price of the 3.25 percent security maturing in June 2021 advanced 52 cents to C$107.

The Canadian dollar tracked the euro lower against the U.S. dollar as Italy sold less than its maximum target at a bond auction and Fitch Ratings said part of the plan to contain debt turmoil amounts to a Greek default. European Union leaders agreed this week to boost the region’s rescue fund capacity to 1 trillion euros ($1.4 trillion) and persuaded holders of Greek bonds to accept a 50 percent writedown on the country’s debt.

“There’s a general pullback in risk sentiment,” said Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, in a telephone interview. “We’re not seeing too much follow-through on the risk rally. There’s still a lot of implementation risk.”

Canada’s currency had strengthened to almost its 100-day moving average and a so-called Fibonacci retracement level just below 99 cents per U.S. dollar, Viloria said.

Parity Path

The Canadian dollar should weaken to parity with its U.S. counterpart as traders cover short positions and month-end portfolio-balancing flows push the greenback higher, Brad Schruder, vice president of institutional foreign-exchange sales at Bank of Montreal in Toronto, wrote in a note to clients today. He recommended selling the loonie, as the Canadian currency is sometimes known, on advances to the 99-cent to 98.90-cent range.

Canada’s federal government will probably miss its plan to balance its budget by two years if it doesn’t take additional steps to raise revenue or cut spending, because of slower economic growth, Toronto-Dominion Bank said in a report yesterday.

The government will generate C$8 billion ($8 billion) less revenue through the end of the fiscal year that starts in April 2015, according to a report by Toronto-Dominion Bank economists Derek Burleton and Sonya Gulati. The country won’t run a surplus until the 2016-2017 budget year, and hold C$5.6 billion more debt than planned over five years, the report said.

The Bank of Canada said Oct. 26 said the annualized pace of expansion in the world’s 10th-largest economy will average 1.8 percent in the four quarters through June, compared with a previous estimate of 2.8 percent. The bank cut its projection for global growth in 2012 by 0.9 percentage point, and it said the recovery will be slower than usual as consumers, governments and businesses reduce debt.

“The Bank of Canada was a little more dovish than people were expecting,” Viloria from Gain Capital said. “They pulled back on growth expectations. The Canadian dollar is making a little bit of a corrective move.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE