Canadian Dollar Loses Most in a Month Since September on Europe

Canada’s dollar had the biggest monthly loss since September against its U.S. counterpart as risk appetite faded on Europe’s debt crisis and slowing growth in America, the nation’s biggest trading partner.

The currency, nicknamed the loonie for the image of the bird on the C$1 coin, touched the weakest level this year against the U.S. dollar. Canada’s current-account deficit widened in the first quarter, data showed, adding to signs the slackening pace of global economic expansion will cut demand for its exports. Yields on 10- and 30-year government bonds dropped to record lows.

“The loonie has been swept up in concerns over Europe and its potential impact on global growth,” said Blake Jespersen, director of foreign exchange at Bank of Montreal, said in a phone interview from Toronto. “There is a lot of risk aversion in the market, and that suggests that the Canadian dollar has scope to fall even further against the greenback.”

The currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, depreciated 0.3 percent to C$1.0328 per U.S. dollar at 5 p.m. in Toronto. It touched C$1.0366, the weakest level since Dec. 20, after gaining 0.4 percent earlier. The loonie lost 4.4 percent in May. One Canadian dollar buys 96.82 U.S. cents.

Canada’s currency pared losses as U.S. stocks fluctuated after erasing declines.

Current Account

The nation’s current-account deficit widened to C$10.3 billion ($10 billion) in the first quarter from a revised C$9.7 billion in the fourth quarter of 2011, as exports of industrial goods declined, Statistics Canada said today in Ottawa. The current account is the broadest measure of international trade, encompassing goods, services and investment.

Exports make up a third of Canada’s economy, with three-quarters destined for the U.S. Raw materials including oil account for about half of Canada’s export revenue.

Government bonds climbed for a second day, pushing yields on Canada’s benchmark 10-year security down to 1.713 percent, the lowest level in data compiled by Bloomberg going back to 1989. Yields on the country’s 30-year debt reached a record low 2.278 percent.

Canada will sell $2.6 billion of 10-year notes on June 6, according to a statement today on a central-bank website. The 2.75 percent securities are due in June 2022.

Implied volatility for one-month options on the Canadian dollar versus the greenback approached the highest level since January. It touched 10.34 percent, from a close of 10 percent yesterday. It reached 10.45 percent on May 21, the most since Jan. 6, after falling to 6.59 percent on April 30. The 10-year average is 10 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Volatility, Weakness

“Volatility typically equates to Canadian dollar weakness,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said in a phone interview. He said the currency could trade in a range of C$1.04 to C$1.0425 if turmoil in Europe continues to roil markets.

Spanish bond yields traded at almost the highest since November amid concern the nation’s banks will seek bailouts, and Greece prepared for elections on June 17.

“The European situation has gone from bad to worse, and that has meant horrible performance for the loonie, as global growth concerns remain heightened,” said Steve Butler, managing director in Toronto at Bank of Nova Scotia’s Scotia Capital unit. “The more you look at the problem, it’s clear this is something that isn’t going to be fixed for a long time.”

Greek Poll

U.S. stocks fluctuated after reversing losses as a Greek opinion poll showed support for the largest pro-bailout party and a Wall Street Journal report indicated the International Monetary Fund has started discussing contingency plans for a rescue of Spain. The IMF is not preparing financial aid for Spain, nor has the country sought a loan, a fund spokesman said.

The Standard & Poor’s 500 Index was down 0.2 percent at closing after losing as much as 1.1 percent and gaining 0.5 percent. It fell 6.3 percent in May. Crude oil, Canada’s biggest export, slid to the lowest since October. Crude for July delivery dropped to $85.86 a barrel in New York, compared with a closing on May 1 of $106.16.

The loonie gained 1 percent over the past month versus nine developed-nation counterparts monitored by Bloomberg Correlation-Weighted Indexes. The U.S. dollar was up 6.2 percent, and the yen climbed 8.4 percent, as investors sought refuge from Europe’s debt crisis. The euro weakened 1.6 percent.

Relative Strength

The greenback rose to 70.3 on the 14-day relative strength index against the Canadian dollar, its first day this week above 70 in a move that signals a currency may be poised to reverse direction. It touched 73.6 on May 25, the highest since October.

The Canadian currency will strengthen to parity with the U.S. dollar by the end of September before gaining to 99 cents by March 2013, according to the median forecast in a Bloomberg News survey of 42 economists.

The loonie erased early gains after the U.S. Commerce Department reported gross domestic product increased at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, revised Commerce Department figures showed today in Washington.

Employment data in the U.S. and Canadian gross domestic product figures, both due tomorrow, may increase investor demand for North American currencies, Butler said. U.S. payrolls added 150,000 jobs in May, after an increase of 115,000 in April, and the Canadian economy grew 1.9 percent from January through March in its third quarterly gain, Bloomberg surveys forecast.

Canada’s retail sales rose more than forecast in March, gaining 0.4 percent, Statistics Canada reported last week. Other data in this month have also suggested domestic demand will boost the nation’s economic growth, including the biggest two-month job gain in three decades and gains in wholesale trade.

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