BLBG:Canadian Dollar Drops The Most In A Week Amid Turmoil In Europe
Canada’s dollar depreciated the most in a week as turmoil in the Spanish banking sector added to signs Europe’s debt crisis is spreading to the region’s larger economies, boosting demand for safety.
The Canadian currency was headed for a 4.2 percent decline in May, the biggest monthly loss since September, on speculation softening global growth will reduce chances of a Bank of Canada interest-rate increase. The nation’s 10-year government bond yield dropped to the lowest level since at least 1989, 1.770 percent, and yields on 30-year securities fell to a record low 2.320 percent.
“The rate issue over the past month or so has become a drag on the Canadian dollar,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit, by phone from Toronto. “U.S. dollar sellers can wait. Summer markets and Europe suggest to me that C$1.04 to C$1.06 is the sell range in the next little while.”
Canada’s currency, nicknamed the loonie, declined 0.8 percent to C$1.0301 per U.S. dollar at 5 p.m. in Toronto. It slid as much as 0.9 percent, the biggest intraday drop since May 23, to C$1.0311, almost the weakest since January. One Canadian dollar buys 97.08 U.S. cents.
The currency will strengthen to parity by the end of September before gaining to 99 cents by year-end, according to the median forecast in a Bloomberg News survey of 43 economists.
Volatility Increases
Implied volatility for one-month options on the Canadian dollar versus the greenback approached the highest level since January. It touched 10.13 percent, from 9.57 yesterday. It rose to 10.45 percent on May 21, the most since Jan. 6, after falling to 6.59 percent on April 30. The 10-year average is 10 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.
Benchmark government 10-year notes yielded 1.80 percent, down eight basis points, or 0.08 percentage point, after reaching their record low. Thirty-year yields ended the day at 2.33 percent, down six basis points. Two-year note yields decreased five basis points to 1.12 percent.
Canada sold C$700 million of inflation-linked bonds today. The debt, which matures in December 2044, drew a median yield of 0.437 percent, according to Bank of Canada data. The bid-to- cover ratio -- the amount bid relative to the amount offered -- was 2.63 times, compared with an average of 2.42 times at the past five auctions of long-term real-return bonds. The last sale on Feb. 22, fetched a median yield of 0.554 percent and a bid- to-cover ratio of 2.58 times.
U.S. Dollar
Crude oil for July delivery dropped as much as 3.9 percent to $87.27 a barrel in New York, the weakest level since October, before trading at $87.45, down 3.7 percent. The Standard & Poor’s 500 Index tumbled 1.4 percent.
The U.S. dollar rose against all of its 16 most-traded peers except the yen as investors sought refuge.
“I would be bid for the U.S. dollar,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada (NA) in Toronto, in a phone interview, meaning he expects the greenback to gain versus the Canadian dollar. “I would look for C$1.0320 as the next critical level of dollar-Canada resistance. I think buying the dollar on dips makes sense. It’s a flight to liquidity.” Resistance is an area on a chart where sell orders may be clustered, in this case for the U.S. currency.
Relative Strength
The greenback rose to 69 today on the 14-day relative strength index against the Canadian currency. It touched 73.6 on May 25, the highest since October. A reading above 70 signals a currency may be poised to reverse direction.
Employment data in the U.S. and gross domestic product figures in Canada, both due on June 1, may intensify investor demand for North American currencies, said Spitz. U.S. payrolls added 150,000 jobs in May, after an increase of 115,000 the previous month, and the Canadian economy grew 1.9 percent from January through March in its third quarterly gain, Bloomberg News surveys forecast.
The Canadian central bank has kept its benchmark rate at 1 percent since September 2010.
The loonie gained 2.2 percent over the past three months, the fourth-best performance among 10 developed-nation currencies monitored by Bloomberg Correlation-Weighted Indexes. The U.S. dollar was up 6.9 percent, and the yen advanced 10 percent. The euro weakened 1.6 percent, and Australia’s dollar tumbled 4.5 percent.
‘Across the Board’
“The erosion of the euro is having an impact across the board and having an impact on the high-beta currencies,” National Bank’s Spitz said. “Canadian dollars will continue to be vulnerable.” High-beta currencies tend to have the greatest volatility.
The European Commission called for direct euro-area aid for troubled banks and touted a Europe-wide deposit-guarantee system and common bond issuance as antidotes to the debt crisis now threatening to overwhelm Spain.
The commission, the European Union’s central regulator, sided with Spain in proposing that the euro’s permanent bailout fund inject cash to banks instead of channeling the money via national governments. It also offered Spain extra time to squeeze the budget deficit.
To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net
