BLBG:Canadian Currency Weakens as Europe’s Debt Crisis Hampers Demand for Risk
Canada’s dollar dropped for a second week as rising borrowing costs in the largest euro-region countries signaled the region’s debt crisis is getting harder to contain, weakening the appeal of assets linked to growth.
The Canadian currency touched the lowest level versus the U.S. dollar in almost two months after crude oil, the country’s biggest export, posted its first back-to-back weekly declines since September. Canada’s economy expanded in the third quarter after contracting in the previous three months, Statistics Canada is likely to say next week.
“The window for Europe to fix itself is rapidly shutting,” Camilla Sutton, chief foreign-exchange strategist at Bank of Nova Scotia’s Scotia Capital in Toronto, said in a telephone interview. “It seems like things are escalating,” she said, predicting for the Canadian dollar “further near-term softness.”
The loonie, as the currency is also known for the image of the aquatic bird on the C$1 coin, depreciated 1.8 percent to C$1.0468 per U.S. dollar in Toronto. It slid yesterday to C$1.0524, the weakest level since Oct. 5, before advancing. The currency, the seventh-most-traded, is headed for a 4.4 percent loss in November. One Canadian dollar buys 95.53 U.S. cents.
The Standard & Poor’s 500 Index, which was closed Nov. 24 for a U.S. holiday, dropped 4.7 percent this week, after a 3.8 percent decline last week, while the S&P/TSX Composite Index slid 3.6 percent, its fourth straight loss. Futures on crude oil decreased 0.1 percent to $97.32 a barrel and touched $94.99 yesterday, a two-week low.
Currency Volatility
Implied volatility for three-month options on the Canadian dollar versus the greenback rose this week to as high as 13.54 percent, the most since Nov. 10. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.
Canadian Finance Minister Jim Flaherty says Europe’s debt crisis is creating “contagion” outside the region and policy makers must act while the situation can still be “stabilized.”
“Again today, we are staring a crisis in the face,” Flaherty said in the text of a speech he gave yesterday in Toronto. “The crisis remains far from resolved.”
Canada’s gross domestic product expanded at an annualized 3 percent pace in the three months through September, after contracting 0.4 percent in the second quarter, according to the median of 23 forecasts compiled by Bloomberg. Statistics Canada is due to release the report on Nov. 30 in Ottawa.
Job Gains
Employers added 17,5000 jobs in November after cutting 54,000 positions the month before, the statistics agency is likely to say on Dec. 2, according to the median forecast in a separate Bloomberg News survey.
European leaders have spent two years struggling to prevent contagion from affecting the region’s largest economies such as France and Germany. Italy had to pay almost 7 percent to sell six-month bills at an auction today, and Germany failed to sell 35 percent of 10-year bonds on offer at a Nov. 23 sale.
The cost for European banks to fund in dollars reached a three-year high. Three-month cross currency basis swaps, the rate banks pay to convert euro payments into dollars, fell as much as 1.61 percentage points below the euro interbank offered rate, the most expensive since October 2008, data compiled by Bloomberg show.
The euro touched a seven-week low against the dollar on Friday after German Chancellor Angela Merkel’s Nov. 24 comments about joint euro bonds sending a “wrong signal” damped optimism about a potential remedy for the region’s debt crisis. Joint euro bonds would immediately lead to a convergence of interest rates in the region, Merkel said in comments at a press conference in Strasbourg, France.
‘Santa Claus Rally’
“Germany’s ‘nein’ to euro bonds essentially put the skids back under risk assets again,” Shaun Osborne, chief foreign exchange strategist at Toronto-Dominion Bank in Toronto, wrote in a note to clients yesterday. “Risk aversion remains the top priority for investors. There’s no Santa Claus rally in sight as European sovereign and systemic risks continue to rise.”
The loonie has weakened 3.5 percent this year, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback has gained 2.2 percent, while the euro has added 1.4 percent.
Longer-term Canadian government bonds rose, pushing the benchmark 10-year yield down three basis points, or 0.03 percentage point, to 2.09 percent. It decreased to a record low 1.99 percent on Oct. 4. The price of the 3.25 percent securities maturing in June 2021 gained 27 cents to C$109.95.
Thirty-year yields dropped 10 basis points to 2.64 percent. They touched a record low 2.624 percent on Nov. 24, down from this year’s high of 3.88 percent in February. Two-year yields rose three basis points this week to 0.94 percent.
The nation’s government debt has returned 8.5 percent this year, the most since the financial crisis in 2008, according to a Bank of America Merrill Lynch index.
To contact the reporter on this story: Chris Fournier in Halifax, Nova Scotia, at cfournier3@bloomberg.net
To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net
