The Canadian dollar fell against most of its major peers as government officials in Russia and Japan criticized monetary policies that have devalued major currencies in an attempt to spark economic growth.
It dropped the most in a week against its U.S. counterpart as a Russian central bank official warned the world is on the brink of a “currency war” after the Japanese economy minister said yesterday currency weakness sparked by central-bank policy could hurt consumers. Stocks fluctuated while a government report showed inflation in U.S. was unchanged last month.
Financial markets “are trading with a negative risk tone, so that’s helping to weigh on the Canadian dollar,” said Mazen Issa, Canada macro strategist at Toronto-Dominion Bank’s TD Securities by phone from Toronto. “If we look at the last two to three months, the correlation with the Canadian dollar and risk assets has tightened and equities are pretty flat today.”
The Canadian dollar, known as the loonie for the image of the waterfowl on the C$1 coin, declined 0.2 percent to 98.59 cents per U.S. dollar at 5:05 p.m. in Toronto. One loonie buys $1.0143.
Futures on crude oil, Canada’s largest export, rose 0.9 percent to $94.16 per barrel and the Standard & Poor’s 500 Index of stocks was little changed after falling as much as 0.3 percent.
Options traders are almost the least bearish on the Canadian dollar as they’ve been in two years. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against the loonie versus contracts to sell, traded at 0.8 percent today, close to the 0.7 percent level touched Dec. 12 that was the lowest since November 2010.
Canada’s benchmark 10-year bonds rose, with yields falling two basis points, or 0.02 percentage point, to 1.89 percent. The 2.75 percent note due in June 2022 rose 16 cents to $107.36.
The Bank of Canada sold C$3.3 billion ($3.4 billion) of two-year notes at an average yield of 1.201 percent. The central bank received bids totaling C$9.02 billion for the 1 percent notes maturing in May 2015.
The Canadian dollar fell after Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said Japan’s policy of weakening the yen may prompt other countries to do the same, sparking a currency war. Jean-Claude Juncker, prime minister of Luxembourg and chair of the Group of 20, complained the euro was “dangerously high” yesterday and Norwegian Finance Minister Sigbjoern Johnsen said a strong krone challenges the economy.
European Central Bank policy maker Ewald Nowotny said the euro exchange rate is “not a major concern.”
“The volatility comes on the back of the rhetoric that’s coming primarily from Europe, but even before that from Asia,” said Jack Spitz, managing director of foreign exchange at the National Bank of Canada by phone from Toronto. “Juncker’s comments, Nowotny’s comments yesterday and overnight are creating volatility in the intraday market from a euro perspective and it’s affecting a number of currencies, not least of which is the Canadian dollar.”
A reading of the cost of living in the U.S. was little changed in December, indicating the U.S. economy is not growing fast enough to spark fears of inflation.
The German government cut its growth forecast for Europe’s biggest economy on cooling demand for exports. German gross domestic product growth will slow to 0.4 percent this year from 0.7 percent in 2012, the Economy Ministry said in its annual report, compared with a previous forecast for 1 percent expansion.
“To some extent, there was a bit of intention to bring down the strength of the euro,” TD’s Issa said. “Just looking at the euro in general, it’s appreciated quite a bit and just looking at the fundamentals in terms of the economy there it doesn’t necessarily warrant such a strong currency.”
The loonie has fallen 1.3 percent during the past six months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The euro has gained 4.5 percent while the greenback has dropped 4.1 percent.