BLBG: Canada's Dollar Falls to the Lowest in More Than Three Years
By Chris Fournier
Oct. 22 (Bloomberg) -- Canada's currency dropped to the lowest since June 2005 as the U.S. dollar strengthened, crude oil fell to a 15-month low and speculation mounted the country's central bank would extend interest-rate cuts.
The loonie, as the currency is known because of the aquatic bird on the one-dollar coin, is poised for its worst monthly performance since at least 1971, when Bloomberg records begin. It has depreciated 15 percent in October.
``It's a question of not catching a falling knife,'' said Samarjit Shankar, director of global strategy for the foreign- exchange group in Boston at Bank of New York Mellon, the world's largest custodial bank. ``It's still the almighty dollar. There's net selling across the board. With the outlook for monetary policy, combined with the continued softness in oil prices and the concerns about global growth, the loonie is taking the brunt of it.''
The Canadian dollar depreciated by as much as 3.2 percent to C$1.2546 per U.S. dollar, from C$1.2141 yesterday. It touched the lowest since June 14, 2005. It traded at C$1.2506 at 11:55 a.m. in Toronto. One Canadian dollar buys 79.95 U.S. cents.
The Standard & Poor's/TSX Composite Index fell 2.8 percent to 9,528.87 in Toronto. Canada's main stock index has lost 45 percent of its value this year, when measured in U.S. dollar terms. The Dow Jones Industrial Average lost 294 points.
`Melting Down'
``Equities and commodities are melting down and risk reduction has morphed into capitulation,'' said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. ``Currency movements are all about deleveraging within a toxic investment environment. These moves can only be described as spectacular, one way and unprecedented.''
The Bank of Canada yesterday cut the cost of borrowing by 25 basis points to 2.25 percent, and said further easing may be required. A basis point is 0.01 percentage point. Crude oil dropped to as low as $67.50 a barrel today.
``The U.S. dollar continues to reign supreme -- you just cannot fight the trend,'' said Steven Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto. ``We have moved so far, so fast, everyone appears to be getting squeezed. It's very overdone, but too soon to call a top.''
The loonie is down 5.4 percent since Oct. 17, headed for its fourth straight weekly decline. The currency has dropped 20 percent this year and is down 19 percent since crude reached a record $147.27 on July 11.
Crude accounts for 21 percent of the weighting in the Bank of Canada Commodity Price Index, the largest single component. The Index fell 6.6 percent last week to the lowest in more than a year. Crude oil and natural gas generate 17 percent of domestic export revenue, according to Statistics Canada. Natural gas has lost 7.5 percent this year.
Price Target
``We expect the upward price pressure on the U.S. dollar versus the Canadian dollar to continue while equity and commodity prices remain bid,'' George Davis, chief technical analyst at RBC Capital Markets in Toronto, a unit of Canada's largest bank, wrote in a note. ``We are establishing C$1.2620 as our next medium-term price target -- for what it's worth.''
The drop in the Canadian dollar ``has taken out all my topside objectives,'' said Jonathan Gencher, director of foreign- exchange sales at Bank of Montreal in Toronto. ``It's U.S. dollar strength, pure and simple.''
The U.S. dollar advanced today against all of the 16 most- actively traded currencies except the Japanese yen and the Australian dollar.
Market Stability
``The U.S. dollar is still well bid across the board,'' said Shane Enright, currency strategist at CIBC World Markets Inc. in Toronto. ``Funding problems continue to dissipate, with a lower Libor fix again, but the market needs a few days of market stability in both equities and funding it seems.''
The 10-year note's yield slipped 6 basis points, or 0.06 percentage point, to 3.64 percent. The price of the 4.25 percent security maturing in June 2018 climbed 50 cents to C$104.96.
``Monthly technical indicators continue to show neutral to positive underlying bond market trends for longer maturities,'' Sheldon Dong, a fixed-income analyst in Toronto at TD Securities Inc., wrote in a note to clients. The 10-year bond's yield will trade between 3.45 percent and 3.85 percent over the intermediate term, Dong said.
The yield on the two-year government bond dropped 2 basis points to 2.15 percent. The price of the 2.75 percent security due in December 2010 advanced 3 cents to C$101.24.
The 10-year bond yielded 149 basis points more than the two- year security, down from 153 basis points yesterday. The so- called yield curve rose to 158 basis points on Oct. 10, the steepest since September 2004.
The two-year bond's yield will rise to 2.53 percent by the end of this year, while the 10-year bond's yield will reach 3.71 percent, according to the median forecasts of economists surveyed by Bloomberg News.
Canadian government bonds have returned 4.6 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries have returned 5.4 percent this year.
To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
