Canadian Dollar Drops From One-Week High on Reduced Risk

Canada’s dollar fell for the first time in three days versus its U.S. counterpart as losses in Spanish bond markets signaled increased concern the European sovereign-debt crisis is getting worse.

The Canadian currency declined from a one-week high as investors sought refuge in the greenback. The so-called loonie dropped this week versus the yen and the commodity-linked peers of Australia and New Zealand. Government bonds rose today before the Bank of Canada’s decision next week on interest rates.

“Spain is selling off quite aggressively,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, in a telephone interview from Toronto. “That seems to be translating into a general sort of risk-off kind of feeling here. The U.S. dollar does better in those types of environments.”

Canada’s currency depreciated 0.5 percent to 99.97 cents per U.S. dollar at 5 p.m. in Toronto, after touching 99.27 cents, the strongest level since April 6. One Canadian dollar buys $1.0004. The loonie posted a 0.3 percent loss this week.

UBS AG revised its one-month and three-month forecasts for the Canadian dollar to 99 cents and 98 cents from C$1.01 and C$1.03 previously, Cameron Umetsu, a Tokyo-based currency strategist, wrote in a note to clients. Recent strength in employment data in Canada has increased the likelihood that the central bank will boost borrowing costs, according to Umetsu.

Bank of Canada

Bank of Canada Governor Mark Carney kept the target lending rate at 1 percent last month in the longest pause since the 1950s on signs a strong currency and a fragile global recovery will restrain exports. Policy makers meet again April 17.

The rally today in government bonds pushed the yields on 10-year securities down six basis points, or 0.06 percentage point, to 1.99 percent. The yields fell on April 10 to below 2 percent for the first time since March 13.

The loonie will appreciate to 98 cents by the end of 2012, according to the median forecast in a Bloomberg News survey of economists. The Australian dollar will rally to $1.05, and New Zealand’s currency will trade little changed at 83 U.S. cents, according to the median projections in separate surveys.

“What the commodity currencies offer is high yield to the U.S. and more positive growth prospects,” said Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA in London, in a telephone interview, referring to the dollars of Canada, Australia and New Zealand. “We quite like them.”

Drop in Crude

Futures on crude oil, Canada’s biggest export, dropped 0.8 percent to $102.84 a barrel in New York today after rising yesterday to the highest close since April 3.

Implied volatility for one-month options on the Canadian dollar versus the greenback decreased to 7.12 percent, compared with 6.75 percent on March 19, the lowest level since June 2007. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings. Lower volatility tends to favor higher-yielding currencies such as the Canadian dollar.

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