BLBG: Loonie Falls for First Week in Month as Data Point to Slowing U.S. Growth
Canada’s dollar declined against its U.S. counterpart for the first week in a month as stocks and commodities tumbled and economic data pointed to a slowing recovery in the U.S., the nation’s largest source of trade.
The Canadian currency fell after the Federal Reserve said on Aug. 10 it will revive purchases of Treasuries to help spur the U.S. economy and a report showed Canada’s trade deficit unexpectedly widened. Crude oil, the nation’s largest export, dropped 6.8 percent. Canada’s annual inflation rate increased in July, a report next week is forecast to show.
“The market is very concerned that growth isn’t going to pick up nearly as quickly as hoped, and risk-off trade has been the result,” said Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia’s Scotia Capital unit. “The emphasis the market is taking is that the Fed’s worried.”
Canada’s dollar, nicknamed the loonie, depreciated 1.4 percent to C$1.0419 per U.S. dollar yesterday in Toronto, from C$1.0274 on Aug. 6. The currency touched C$1.0494 on Aug. 12, the weakest level since July 22. One Canadian dollar buys 95.98 U.S. cents.
The Fed said in a statement after a policy meeting that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.” It directed the New York Fed’s trading desk to reinvest what holdings of maturing agency and mortgage-backed securities into Treasuries.
European Outlook
The loonie rose versus half of its 16 most-traded counterparts this week, strengthening 2.7 percent against the euro amid speculation Europe’s economic recovery will falter.
Spanish banks borrowed a record amount from the European Central Bank in July as investors shunned the indebted nation’s lenders, according to daily averages compiled by the Bank of Spain. Greece’s economy contracted for a seventh quarter and unemployment rose, two reports showed Aug. 12.
“The appetite for Canadian dollars is going to become greater if you see more problems coming out of Europe,” said John Curran, a Toronto-based senior vice president at CanadianForex Ltd., an online foreign-exchange dealer. “If the Canadian dollar continues to perform relatively decent, it will outperform most European currencies.”
The MSCI World Index of equities in 24 developed markets fell for the first time in four weeks, dropping 4.2 percent. The Standard & Poor’s 500 Index slipped 3.8 percent.
Oil Tumbles
Crude oil for September delivery tumbled 6.6 percent to $75.39 a barrel and touched $75.01, the lowest in a month. The Reuters/Jefferies CRB Index of raw materials fell 2.2 percent, its first weekly loss since the five days ended July 2. Raw materials account for about half of Canada’s export revenue, and crude is the nation’s biggest export.
Canada’s trade deficit unexpectedly widened in June to C$1.13 billion ($1.09 billion) from a revised C$695 million gap in May on falling sales of gold, energy and automobiles, Statistics Canada said Aug. 11 in Ottawa.
Trade will shave 1.6 percentage points from Canada’s economic growth rate this year, the Bank of Canada said last month. While Governor Mark Carney has raised the benchmark interest rate twice since June 1, bringing it to 0.75 percent, he has said further action would be “weighed carefully against domestic and global economic developments.”
Rate-Boost Probability
The probability of a quarter-percentage point boost in the rate in September fell to 47 percent yesterday from 60 percent on Aug. 9, according to the Bank of Nova Scotia. There’s a 100 percent chance of a raise by December, according to bank data.
“Canada doesn’t need stimulus,” said CanadianForex’s Curran, who predicts the policy makers will hold off on a rate increase. “They just need to not overdo the lack of stimulus. They don’t need to clamp down anymore.”
The annual inflation rate in Canada accelerated to 1.9 percent last month, from 1 percent in June, according to the median forecast of 15 economists in a Bloomberg survey before the government’s statistics agency reports the data on Aug. 20.
Government bonds gained for a third week. Yields on Canada’s benchmark 10-year security fell 9 basis points, or 0.09 percentage point, to 2.98 percent. They touched 2.96 percent on Aug. 12, the lowest level since April 2009. The price of the 3.5 percent note due in June 2020 increased 78 cents to C$104.37, from $103.59 on Aug. 6. The 2-year note’s yield dropped 7 basis points to 1.38 percent.
Canada sold C$3 billion of two-year notes on Aug. 11, drawing an average yield of 1.524 percent. It received bids of C$7.6 billion for the 1.5 percent debt maturing in December 2012, according to a statement on the Bank of Canada’s website.
Five-Year Sale
The government will sell C$3.5 billion of five-year bonds on Aug. 18. The 3 percent securities mature in December 2015.
Pacific Investment Management Co. founder Bill Gross told the Globe and Mail newspaper this week he’s “in awe” of countries such as Canada that have a low debt-to-gross-domestic- product ratio and solvent financial institutions. Gross said he been raising his “exposure” to Brazilian and Canadian government bonds.
Canada’s government bonds have returned investors 5.47 percent this year, according to the Bank of America Merrill Lynch Canadian Governments index.
