BLBG: Canada Dollar Loses Momentum as Gains Outstrip Economic Growth
June 13 (Bloomberg) -- The Canadian dollar’s three-month rally stalled amid speculation the pace of gains were too strong for the global economy to support.
Bank of Canada Governor Mark Carney said the rise in the currency, which climbed 16 percent since falling to a four-year low in March, may threaten the nation’s economic growth if it continues. He downplayed prospects for a quick global recovery from recession. Finance Minister Jim Flaherty said there may be a “speculative element” to the currency’s appreciation.
The Canadian dollar is “running out of momentum,” said Sophia Drossos, a currency strategist at Morgan Stanley in New York. “It is not surprising, given the magnitude of the recent rally. Also, it seems that the bar of expectations for the ‘green shoots’ is now higher.”
The currency, known as the loonie for the aquatic bird on the nation’s C$1 coin, finished the week at C$1.1190 per U.S. dollar yesterday in Toronto, the same as on June 5. One Canadian dollar bought 89.36 U.S. cents. The loonie touched C$1.1291 on June 8, the weakest level since May 26.
Canada will post a record deficit of C$50.2 billion ($45.7 billion) in 2009 as the economy shrinks more than expected and public spending on unemployed workers increases, the government said this week.
“We shouldn’t overplay at this stage the green shoots, to use the popular term, and we shouldn’t underestimate the scale of the challenge,” Carney told reporters June 11 in Montreal. “Economies are going to grow initially because of the scale of monetary and fiscal stimulus, not in spite of it.”
‘Fully Offset’
A continuation of the Canadian currency’s gains could “fully offset” positive developments in the nation’s confidence and financial markets, Carney said, reiterating a June 4 statement by the central-bank.
“He’d made these comments a couple of times,” said Meg Browne, a senior currency strategist at Brown Brothers Harriman & Co. in New York. “The second time the market was ready to take notice.”
Finance Minister Flaherty, in an interview June 11 on CTV television, voiced concern about speculation in the currency’s appreciation.
The loonie fell this week against 12 of the 16 most-traded currencies tracked by Bloomberg. It gained against only the Taiwanese dollar, Mexico’s peso and the South Korean won.
Canada’s currency failed to keep up with an advance by the nation’s biggest export, crude oil. It gained 5.3 percent to $72.20, the highest weekly close since Oct. 10.
Stocks Rise
Stocks rose, with the MSCI World, a benchmark index for 23 developed markets, gaining 1.2 percent and the Standard & Poor’s 500 Index up 0.7 percent. The Canadian dollar has a 30-day correlation coefficient of 0.56 and 0.48 with the indexes, respectively, according to Bloomberg data. A reading of 1 would indicate they move in lockstep. The correlation with crude oil was 0.65.
The Reuters/Jefferies CRB Index of 19 raw materials fell 1.7 percent for the week. Raw materials including oil account for more than half of Canada’s export revenue.
The pullback in the Canadian dollar is a chance for investors to “reload” bets on the currency, according to a Citigroup Inc. strategy note to clients yesterday from Todd Elmer, a currency strategist in New York.
‘Well Positioned’
“We think the fundamental backdrop is still very supportive of the Canadian dollar,” Elmer said in a telephone interview. Acceleration in the global economy “looks to be continuing apace, and given that Canada is showing more financial-sector resilience than just about any other country, we think that leaves it well-positioned.”
Elmer said he expects the currency to rise to C$1.08 per U.S. dollar.
The Bank of Canada left the benchmark interest rate at a record low 0.25 percent on June 4 and Carney said several times he has no plans to raise it over the next year. The central bank has said it also can use unconventional measures such as asset purchases to try to spur the economy if necessary.
Canadian government bonds lost investors 2.7 percent so far this year, according to a Merrill Lynch & Co. index. The 10-year note’s yield rose seven basis points this week, or 0.07 percentage point, to 3.51 percent. The price of the 3.75 percent security maturing in June 2019 fell 57 cents to C$102.05.
