Canada’s Dollar Declines for Third Week Amid Syria Speculation

The Canadian currency fell for a third week as the possibility of a U.S. military strike against Syria damped appetite for riskier assets and burnished the haven appeal of the U.S. dollar.

Canada’s dollar fluctuated as a U.S. intelligence report concluded with “high confidence” Syria carried out a chemical attack against its own people, while Secretary of State John Kerry said the U.S. was committed to a “diplomatic process” on the country. The currency rose earlier today after data showed Canada’s economy grew more than forecast in the second quarter even after shrinking in June the most since 2009.

“It would appear the knee-jerk reaction to a Syrian strike would return to the old risk-off scenario, which is favorable for the U.S. dollar across the board,” John Curran, a senior vice president at CanadianForex Ltd., an online foreign-exchange dealer, said by phone from Toronto. “However, if it did occur I think you’d find people willing to buy Canadian dollars, as oil would be going stronger.” Oil is Canada’s biggest export.

The loonie, as Canada’s dollar is nicknamed for the image of the aquatic bird on the C$1 coin, lost 0.4 percent this week and dropped 2.5 percent this month.

The currency was little changed at C$1.0537 per U.S. dollar at 5 p.m. Toronto time. It earlier touched C$1.0558, the weakest level since Aug. 23, and strengthened to C$1.0509. One loonie buys 94.90 U.S. cents.

Net Shorts

Bets by futures traders the Canadian dollar will weaken versus its U.S. peer outnumbered by the most in 10 weeks those it will gain, data from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 24,959 on Aug. 27, the most since June 21.

Implied volatility for three-month options on Canada’s dollar versus its U.S. counterpart increased for the first time in four days, rising to 7.81 percent, from 7.69 percent yesterday. The measure is used to set option prices and gauge the expected pace of currency swings. The average for this year is 6.8 percent.

Canada’s 10-year government bonds fell today, pushing yields up one basis point, or 0.01 percentage point, to 2.61 percent. The price of the benchmark 1.5 percent debt due in June 2023 lost 8 cents to C$90.49.

The nation’s gross domestic product expanded 1.7 percent from April through June, slowing from a 2.2 percent pace from January through March, Statistics Canada reported today in Ottawa. A Bloomberg survey projected growth of 1.6 percent.

The second quarter ended with a 0.5 percent decline in June that was the most in a month since March 2009, during the last recession, the data showed. Economists forecast a 0.4 percent monthly contraction.

‘Disappointing Side’

“Data this morning was a little on the disappointing side overall -- it underscores the fairly slow growth profile we’ve seen for the first half of the year,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, by phone from Toronto. “It suggests the handoff to the early part of the third quarter is still going to be soft.”

The economy of the U.S., Canada’s biggest trade partner, expanded 2.5 percent in the second quarter, higher than the initial estimate, beating a forecast for a 2.2 percent gain, a report showed yesterday.

The Bank of Canada’s next rate decision is due Sept. 4. The central bank, which has held the benchmark rate target at 1 percent since September 2010 to support the economy, has had a bias for more than a year toward raising rates.

Bank Forecasts

The bank, in its July monetary policy report, predicted 1 percent growth in the second quarter, increasing to 3.8 percent in the third quarter before slowing to 2.5 percent from October through December.

The U.S. intelligence community’s findings “are as clear as they are compelling,” Kerry said at the State Department as the four-page intelligence assessment was released. The document is part of the case being built by President Barack Obama to justify taking military action against Syrian President Bashar al-Assad’s government for a chemical attack the U.S. said killed 1,429 people earlier this month in a Damascus suburb.

Obama said in brief remarks at the White House the Syrian government’s use of chemical weapons is a direct threat to U.S. and global security, and indicated the U.S. was ready to act to hold the Assad regime accountable.

France signaled it might act as the principal U.S. ally in an attack against Syria, filling a hole left after British lawmakers pulled the U.K. out of military action.

Crude Oil

Crude oil, Canada’s biggest export, fell for a second day after the British action reduced prospects of an imminent assault. Futures on crude climbed Aug. 28 to $112.24 a barrel in New York, the highest since May 2011, amid speculation the turmoil could disrupt the supply of oil from the Middle East. They traded today at $107.66, above August’s $106.49 average.

“Rises in oil prices due to geopolitical tensions are not positive for the Canadian dollar,” said David Watt, chief economist at the Canadian unit of HSBC Holding Plc., by phone from Toronto. “Fundamentally driven increases in oil prices are positive, but when you start getting oil prices driven by non-fundamental factors, Canada starts reacting more like a risk-sensitive security than an oil-producing nation.”

The Canadian dollar lost 1.4 percent in the past month in a basket of 10 developed-nation currencies tracked by the Bloomberg Correlation-Weighted Index. Currencies of other commodity-exporting countries such as Australia, Norway and New Zealand also sank, while the U.S. dollar gained 1.1 percent.

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