The Canadian dollar weakened beyond C$1.05 per U.S. dollar to reach its lowest point in almost two years on bets the U.S. currency will strengthen when the Federal Reserve ends monetary stimulus.
The loonie, as the currency is nicknamed, depreciated against the majority of its 16 most-traded peers after Fed Chairman Ben S. Bernanke’s said last week policy makers may begin reducing $85 billion of monthly bond purchases this year if the economy achieves the central bank’s objectives. Monetary stimulus tends to devalue a currency. Canada’s dollar pared its losses after Fed Bank of Dallas President Richard Fisher said investors shouldn’t overreact to Bernanke’s statement.
“Given the underlying price action and the sentiment out there in the market there’s still potential for Canada to continue to weaken off here and the dollar in general to strengthen,” said Matthew Perrier, director of foreign exchange at Bank of Montreal, by phone from Toronto. “I think you look for opportunistic corrections in the market to get in long-dollar positions if you’re not in any.” A long position is a bet an asset will increase in value.
The loonie fell 0.4 percent to C$1.0501 per U.S. dollar at 5 p.m. in Toronto, after reaching its lowest level since Oct. 5, 2011. One loonie buys 95.23 U.S. cents.
Investors shouldn’t overreact to the U.S. central bank’s plans to reduce the pace of asset purchases, Fisher said in an interview with the Financial Times published today on its website. Investors behaved like “feral hogs” after the June 19 comments by Bernanke, he said, according to the newspaper.
“He’s trying to reinforce that they’re still easing, so that’s something that’s going to weigh a bit on the U.S. dollar,” said Eric Viloria, senior currency strategist for Gain Capital Group LLC, by phone from New York.
Canada’s 10-year benchmark government bonds fell, with yields rising four basis points or 0.04 percentage point, to 2.49 percent. The 1.5 percent security maturing in June 2023 lost 32 cents to C$91.39.
Futures on crude oil, Canada’s largest export, gained 1.3 percent to $94.90 per barrel in New York and the Standard & Poor’s 500 Index of U.S. stocks fell 1.2 percent.
Implied volatility for three-month options on the Canadian dollar versus its U.S. counterpart traded at 8.87 percent, the highest point in a year. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.
The loonie touched the 100 percent Fibonacci retracement level of its appreciation in the past year, according to data compiled by Bloomberg. If the loonie closes below the C$1.0556 per U.S. dollar level that would suggest there are additional losses ahead, according to George Davis, chief technical analyst for fixed income and currency strategy in Toronto at Royal Bank of Canada, in an e-mail message.
The 14-day relative strength index versus the greenback fell to 29.92 percent, less than the 30 percent level some traders see as a sign an asset has weakened too quickly.
“There’s no technical levels left any more, they’re all gone,” said Greg Anderson, head of global foreign exchange strategy at Bank of Montreal. “U.S yields is the number one story that’s driving global equities low, it’s driving global commodities lower, and it’s got people kind of panicking out of emerging market currencies, and secondarily, out of the commodity currencies.”
The cost to insure the Canadian dollar against declines versus its U.S. counterpart fell from its highest point in almost a year. The one-month so-called 25-delta risk reversal rate fell to 1.7900, after reaching 1.8550 June 21, the highest since July 2012. Risk reversals measure the premium on options contracts to sell Canadian dollars versus buying U.S. contracts that do the opposite.
The Canadian dollar has fallen along with the currencies of fellow commodity exporters in the past month against a basket of nine developed nation currencies tracked by the Bloomberg Correlation-Weighted Index. The loonie weakened 1.2 percent while the Australian and New Zealand dollars lost 3.9 percent and 4 percent, respectively. The U.S. dollar has gained 0.8 percent.