Canadian Dollar Drops for First Time in 4 Days on Risk Aversion

Canada’s dollar depreciated after outperforming all other Group of 10 currencies this week as investors shied away from riskier assets such as commodity- linked currencies.
The loonie, as Canada’s dollar is known, weakened for the first time in four days amid speculation New York-based CIT Group Inc., once the biggest independent commercial lender, may go bankrupt. The currency rose 4.6 percent versus the U.S. dollar from July 10 through yesterday as corporate earnings and commodity price gains whetted investor risk appetite. Raw materials account for more than half of Canada’s export revenue.
“The CIT situation is helping a subtext of risk aversion make itself felt even during what has been a rather positive earnings season,” said Sacha Tihanyi, a currency strategist in Toronto at Scotia Capital Inc., a unit of Canada’s third-largest bank. “This is putting some pressure on” the loonie.
The currency weakened 0.5 percent to C$1.1181 per U.S. dollar at 4:05 p.m. in Toronto, from C$1.1126 yesterday, when it reached C$1.1118, the strongest since June 12. One Canadian dollar buys 89.43 U.S. cents.
Investors should buy the Canadian dollar against the yen because risk appetite is improving and Japan’s currency may suffer from political uncertainty, according to Citigroup Inc.
The New York-based bank entered a long Canadian-dollar position against the yen and expects the cross trade will reach 90 yen per loonie, a team of strategists wrote in a research note today. The Canadian currency traded at 83.90 yen. Going long a currency is betting it will rise. That would be a 7.3 percent gain.
‘On the Mend’
“Risk appetite remains clearly on the mend,” the Citigroup analysts wrote. “Since equities, yields and commodities are all tracking higher in the wake of this improvement in sentiment, we suspect that the Canadian dollar may be among the biggest beneficiaries.”
The loonie outperformed all of the 16 most-traded currencies tracked by Bloomberg so far this month, gaining 4 percent. It was the worst performer in June amid concern an economic recovery would be delayed. Australia’s and New Zealand’s currencies, the loonie’s commodity-linked peers, are down 0.1 percent and up 0.3 percent this month, respectively.
“The prospects for the Canadian economy are improving, but if you look at some of the incoming contemporaneous numbers, they’re still pretty weak,” Steve Englander, chief currency strategist at Barclays Capital Inc., said today in a Bloomberg Television interview. “I don’t think the bank of Canada really feels given the current state of the economy that the Canadian dollar should appreciate anywhere close to parity.”
Consumer Prices
Canadian consumer prices fell 0.3 percent last month from a year ago, according to the median forecast of 22 economists surveyed by Bloomberg. The nation’s statistics agency is due to release the data tomorrow at 7 a.m. in Ottawa. Gross domestic product contracted in April for a ninth month, declining 0.1 percent, Statistics Canada reported June 30.
The Bank of Canada is scheduled to meet July 21 on interest rates. The key rate has been at a record low of 0.25 percent since April. Bank Governor Mark Carney halved the key rate to a record low of 0.25 percent in April. In June he said at least twice the “rapid rise” of the nation’s currency, which gained the most in May since 1950, could threaten the economy.
CIT Group said yesterday the U.S. government wouldn’t rescue the company. Talks with regulators broke off and “there is no appreciable likelihood of additional government support being provided over the near term,” CIT said in a statement.
Bonds Rise
Canada’s dollar will weaken to C$1.13 by the end of the third quarter and C$1.14 by year-end, according to the median forecast of 35 economists surveyed by Bloomberg News. Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, predicted the currency will weaken to C$1.15 by October before bouncing back to C$1.10 by January.
Government debt rose, with the 10-year Canadian bond’s yield falling eight basis points, or 0.08 percentage point, to 3.41 percent. The price of the 3.75 percent security due in June 2019 gained 71 cents to C$102.85. Canada’s government bonds have lost investors 2.5 percent this year, according to a Merrill Lynch & Co. index.
The nation may need to run budget deficits for a decade if Prime Minister Stephen Harper chooses not to raise taxes or cut spending to erase fiscal shortfalls, Dale Orr, an Economic Insight economist, said today.
Harper told reporters July 10 his government would post budget deficits as long as needed to spur growth, pledging not to adhere to a five-year timetable to balance the budget if that required tax increases or reducing spending.
“There has been quite a roller coaster ride in foreign exchange markets over the course of the last several weeks, and today was no different,” Bank of New York Mellon’s Woolfolk said in an interview. “Even though Canada has a fiscal deficit right now because they’re struggling with a recession, by comparison it’s far smaller than any other of the Group of Seven countries.”