Canada’s dollar drops after Central Bank warns it’s too strong

Canada’s dollar fell the most in four months after the nation’s central bank intensified its warning the currency is growing too strong, boosting speculation it will not raise interest rates any time soon.

The Bank of Canada’s statement is “pretty much a frontal assault on the currency,” said David Watt, senior currency strategist in Toronto at RBC Capital Markets, a unit of Canada’s biggest bank. “They do not want to see parity.”

The Canadian dollar touched the lowest level since Oct. 9 after policy makers said in a statement its strength will “more than fully offset” recent signs of economic growth in the nation. The currency, nicknamed the loonie, gained 19 percent this year through yesterday. The central bank held the target rate for overnight loans at 0.25 percent today, as all 26 economists in a Bloomberg News survey predicted.

The currency depreciated as much as 2.3 percent to C$1.0527 per U.S. dollar, the biggest intraday decline since June 3, before trading at C$1.0488 per U.S. dollar at 4:48 p.m. in Toronto, from C$1.0284 yesterday. One Canadian dollar purchases 95.34 U.S. cents.

Citigroup Inc. exited a money-losing trade after the drop in the loonie triggered an automatic stop-loss order, strategists Todd Elmer in New York and Michael Hart in London wrote in a note to clients today. The firm’s bet on the Canadian dollar versus the Australian dollar lost 1.7 percent, partly because of the “more-dovish-than-anticipated Bank of Canada policy statement,” the strategists wrote.

Bonds Climb

Canadian government bonds rose, pushing the 10-year note’s yield down nine basis points to 3.42 percent. The price of the 3.75 percent security maturing in June 2019 climbed 71 cents to C$102.68. The yield on the two-year bond tumbled 12 basis points to 1.50 percent.

The loonie posted gains for the past three weeks as it headed for parity with its U.S. counterpart for the first time since July 2008. The probability it will trade at C$1 per U.S. dollar at year-end is 48 percent, down from 66 percent yesterday, according to implied volatility from options trading monitored by Bloomberg.

“Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures,” the Bank of Canada said today in a policy statement on its Web site. “The current strength in the dollar is expected, over time, to more than fully offset the favorable developments since July.”

‘Step Up’ in Rhetoric

A report this month from Statistics Canada showed the nation’s unemployment rate dropped to 8.4 percent in September from 8.7 percent in August as employers added a net 30,600 workers, more than economists forecast. Canadian business spending rose in September more than economists expected, the Ivey purchasing managers’ index showed.

“This appears to be quite a step up in the level of rhetoric,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second-largest bank. “They’re talking quite negatively about the impact of the Canadian dollar. I’d expect the Canadian dollar to slip back a bit. They’re less likely to move rates up any time soon.”

The loonie fell against 15 of the 16 most-traded currencies tracked by Bloomberg. Only Brazil’s real did worse.

Crude oil for November delivery dropped as much as 2 percent to $78.05 a barrel on the New York Mercantile Exchange. Crude is Canada’s biggest export.

U.S. stocks retreated, with the Standard & Poor’s 500 Index falling 0.6 percent as a report showing housing starts rose less than forecast overshadowed better-than-estimated earnings at companies from Apple Inc. to Pfizer Inc.

Australian Rate Cut

After the Reserve Bank of Australia unexpectedly raised interest rates on Oct. 6, becoming the first Group of 20 country to do so since the credit crisis began, traders speculated Canada might be among the first nations to follow suit. The Bank of Canada is trying to “strategically separate themselves” from Australia’s central bank, RBC’s Watt said.

“They had been lumped in with the RBA as among the first movers,” said Watt. “They have clearly said, ‘No, we are not.’”

Traders scaled back bets on future rate increases after the central bank’s statement today. The yield on the overnight index swap due in nine months, based on predictions for the Bank of Canada’s rate at that time, dropped to 0.36 percent, from 0.41 percent yesterday.

The spread between overnight index swaps and the central bank rate narrowed today to 0.11 basis points. It closed at 0.1979 on Oct. 9, the highest level since June 2008.

‘Short Covering’

“There appears to be a lot of short covering by funds and speculative accounts that were selling bankers acceptance contracts heavily following Australia’s surprise hike,” said David Love, a trader of interest-rate derivatives at Montreal brokerage Le Group Jitney Inc., referring to traders who buy back a security to cover wrong-way bets.

The yield on June 2010 bankers’ acceptance futures, a barometer of short-term interest rates, rose as much as 17 basis points, the most since April, as traders cut bets the nation’s central bank will raise borrowing costs sooner rather than later, according to Love. The yield on the futures moves inversely to expectations for interest rates.


Source: bloomberg.com

Publication date: 10/22/2009

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