Canada’s Dollar Drops Amid Speculation Turmoil Worsening

Canada’s dollar weakened to the lowest level since January as the European Central Bank said it will temporarily stop lending to some Greek banks to limit its risk, adding to bets the nation will exit the euro.

The Canadian currency had erased an earlier drop versus its U.S. counterpart as economic data bolstered the outlook for North American growth, strengthening the argument for the central bank to increase interest rates. Crude oil, Canada’s biggest export, fell to a six-month low amid speculation Europe’s debt crisis will worsen.

“It’s a pretty clear risk-off scenario because nobody knows what problem will pop up next,” Lutz Karpowitz, a senior currency strategist at Commerzbank AG, said by phone from Frankfurt. “The credibility of the Greek banking system is gone. The Canadian dollar is a risk-driven currency, so it’s a bit under pressure, but that’s limited to some extent.”

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, depreciated 0.5 percent to C$1.0122 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0133, the lowest since Jan. 25, and earlier gained as much as 0.2 percent. One Canadian dollar buys 98.80 U.S. cents.

Implied volatility for one-month options on the Canadian dollar versus its U.S. counterpart increased to as much as 9.35 percent, the highest in four months. It fell to 6.59 percent on April 30, the lowest level since June 2007. The five-year average is 12 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Bonds Erase Losses

Government bonds erased losses. Ten-year securities rose for a fourth day, pushing yields down one basis point, or 0.01 percentage point, to 1.92 percent. Earlier they gained two basis points to 1.96 percent. They touched 1.91 percent on May 14, the lowest since Feb. 2. Benchmark two-year note yields fell two basis points to 1.28 percent.

Canada sold C$3.3 billion ($3.3 billion) of two-year securities due in August 2014, fetching an average yield of 1.313 percent. There were C$9.3 billion in bids for the 2.25 percent notes, making the bid-to-cover ratio 2.81 times, the highest level for a two-year auction since March 2010.

The loonie was up 0.7 percent over the past week versus nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar gained 1.8 percent, while the euro was little changed.

The ECB said it will push the responsibility for lending to some Greek financial institutions onto the Greek central bank until they have sufficiently boosted their capital. It said in an e-mailed statement that Greek banks needing recapitalization will regain access to normal lending operations once that process has been completed, which it expects will be “soon.”

Balance Sheet Integrity

ECB President Mario Draghi said in a speech in Frankfurt that, while the bank’s “strong preference” is for Greece to stay with the euro, the central bank will continue to preserve “the integrity of our balance sheet.”

The move “just adds steam to the Greek drama,” said Firas Askari, head currency trader at Bank of Montreal in Toronto. “All markets are extremely jittery right now.”

The loonie reversed losses earlier after Statistics Canada reported factory sales rose at the fastest pace in six months in March as oil refineries increased output while unfilled orders reached a three-year high. Sales climbed 1.9 percent to C$49.7 billion following two previous declines, the data showed.

Industrial production and housing starts in the U.S., Canada’s biggest trade partner, beat forecasts last month, government data showed. Output at factories, mines and utilities increased 1.1 percent, and housing starts rose 2.6 percent.

‘Decent Data’

“Decent data has helped risk bounce,” Steve Butler, managing director in Toronto at Bank of Nova Scotia’s Scotia Capital unit, said via e-mail. “Some U.S. dollar longs are getting pushed out as a lot of currencies look extended” against the greenback, he said. A long position is a bet a currency will appreciate.

Canadian employers added the most workers to payrolls in March and April in three decades, the nation’s statistics agency reported May 11. Bank of Canada Governor Mark Carney said last month interest-rate boosts may be necessary to contain inflation that’s accelerating faster than central bank forecasts. The benchmark rate has been 1 percent since September 2010.

Several Federal Reserve officials said at their last meeting that a loss of momentum in U.S. growth or increased risks to their economic outlook could warrant additional action to keep the recovery on track, minutes released today showed. At the April 24-25 session, they affirmed their plan to hold interest rates at virtually zero through at least late 2014.

The Standard & Poor’s GSCI Spot Index of commodities lost as much as 1.5 percent today to 626.57, the lowest level since Dec. 20, as Greece prepared for a second round of elections in less than two months while default loomed. Crude oil for June delivery dropped to as low as $91.81 a barrel in New York, the least since Nov. 3, before trading at $92.80, down 1.3 percent.

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