Canadian Dollar Drops From Highest Since May on Risk Aversion

Canada’s dollar weakened from an almost four-month high versus its U.S. counterpart after a decline in equities increased investor risk aversion, prompting investors to sell higher-returning currencies.

The dollar had appreciated to the highest level since May 3 as oil gained and stocks rose amid speculation Europe’s debt crisis won’t worsen. The loonie has a 30-day correlation coefficient of 0.81 with the Standard & Poor’s 500 Index. A reading of 1 would indicate they move in lockstep. The correlation with crude oil is 0.63.

“We are seeing a very strong correlation between stocks and the Canadian dollar right now,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said in a telephone interview. “Risk assets are coming off some, but the fundamental story for Canada still argues for stronger performance given an improving global environment.”

Canada’s currency, nicknamed the loonie, declined 0.08 percent to 98.92 cents per U.S. dollar at 5 p.m. in Toronto. It touched 98.43 cents, the strongest since May 3. One Canadian dollar buys $1.0109.

The S&P 500 dropped 0.4 percent after earlier trading above a four-year closing high of 1,419.04 reached on April 2.

Implied volatility for one-month options on the U.S. dollar versus the Canadian currency remained close to the lowest level since May 2007 at 6.3 percent. 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.

Government bonds were steady, with the yield on 10-year bond little changed at 1.93 percent. The price of the 2.75 percent securities maturing in June 2022 increased 8 cents to C$107.31.

Statistics Canada said today that wholesale sales fell 0.1 percent in June, after rising 0.9 percent in May. The median forecast of 15 respondents in a Bloomberg News survey called for sales to rise 0.3 percent.

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