Canadian Currency Declines Most in 2 Weeks as Equities, Crude Oil Decrease
Canada’s dollar fell the most in two weeks against its U.S. counterpart as stocks and crude oil dropped amid concern Europe’s sovereign-debt crisis may worsen.
The currency declined for the first time in three days before Bank of Canada policy makers meet tomorrow on interest rates. The U.S. dollar and the yen gained against most major counterparts as speculation economic growth will slow fueled haven demand. The Wall Street Journal said European bank stress tests understated some holdings of sovereign debt. Government bonds rose, with 10-year yields falling the most in 18 months.
“Worries about Europe have created a risk-off scenario,” Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc., said by phone from New York. Today’s moves are also a “natural pull-back” after higher-yielding currencies including the Canadian dollar strengthened at the end of last week, he said.
Canada’s currency, nicknamed the loonie for the image of the bird on the dollar coin, fell as much as 1.2 percent, the biggest intraday drop since Aug. 24, to C$1.0482 per U.S. dollar. It traded at C$1.0481 per dollar at 4:47 p.m. in Toronto. The loonie gained 1.2 percent last week and closed at C$1.0354 yesterday, when it reached 1.034, the strongest level since Aug. 19. One Canadian dollar buys 95.41 U.S. cents.
The central bank will raise interest rates by a quarter- percentage point with a neutral policy statement, Brown Brothers Harriman & Co. forecast. Marc Chandler, global head of currency strategy at the firm in New York, said in a note to clients it will be a “close call.”
Stocks, Crude Drop
The MSCI World Index of stocks fell for the first time in five days, dropping 1.1 percent, and the Standard & Poor’s 500 Index slid 1.2 percent. Crude oil for October delivery tumbled as much as 2.6 percent to $72.63 a barrel in New York. Crude is Canada’s biggest export, and the loonie tends to track commodities and equities.
The greenback rose today against all but two of its 16 most-traded counterparts, the yen and the Swiss franc. The three currencies, traditionally considered havens, and Brazil’s real were the top four performers over the past month.
“The driver is the U.S. dollar’s generally stronger tone rather than anything Canadian-dollar-specific,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, wrote in a note to clients.
Central banks in Japan and Australia indicated that slower U.S. economic growth limits their policy options. The Reserve Bank of Australia held its key rate at 4.5 percent, saying the global economic outlook remains “somewhat uncertain.” The Bank of Japan kept the benchmark overnight rate at 0.1 percent.
Concern that some European nations may not be able to meet their debt obligations sent Irish and Portuguese government bonds down today, widening the gaps between their 10-year yields and those on German bunds to records, while the German-Greek yield spread increased to the widest since May.
Canadian government bonds surged, driving the yield on the benchmark 10-year note down 13 basis points, the most on a closing basis since March 18, 2009, to 2.9 percent. A basis point is 0.01 percentage point. The price of the 3.5 percent security maturing in June 2020 increased C$1.12 to C$105.79.
Yields on two-year notes fell 10 basis points, the most on a closing basis since June 29, to 1.28 percent. Two-year yields reached an 18-month high 2.07 percent in April, before the European debt crisis spurred concern the global economic recovery was floundering and damped investors’ appetite for higher-yielding assets. The yield slumped to as low as 1.16 percent on Aug. 24, the lowest since January.
The Bank of Canada will release further details of its Sept. 15 auction of two-year bonds on Sept. 9. The previous two-year sale, on Aug. 11, drew an average yield of 1.524 percent and a bid-to-cover ratio, which compares the amount bid with the amount offered, of 2.25 times.
The central bank raised the benchmark rate by 0.25 percentage point at its June 1 meeting and again on July 20, bringing it to 0.75 percent. Governor Mark Carney said further action will be “weighed carefully against domestic and global economic developments.”
Fourteen of 20 economists surveyed by Bloomberg News expect Carney to raise borrowing costs a quarter-percentage point to 1 percent, while the rest say he’ll stand pat. It’s the biggest split since April 2009. Before the June 1 rate announcement, all but two of 27 economists said he would raise rates, and all 20 surveyed in July predicted an increase.