Friday, April 16, 2010

Canadian Currency Drops Most in Seven Weeks as Stocks, Oil Fall

By Chris Fournier and Mary Childs

April 16 (Bloomberg) -- Canada’s dollar dropped the most in seven weeks amid speculation China may revalue its currency soon as stocks tumbled after the Securities and Exchange Commission sued Goldman Sachs Group Inc. for fraud.

The currency, which gained parity with its U.S. counterpart last week for the first time in almost two years, headed for its first weekly loss in April. Crude oil, Canada’s biggest export, fell the most in almost two months as China took steps to rein in its economic growth.

“If a Chinese yuan revaluation happens, you cool down the Chinese economy, there’s less demand for commodities,” said Aroop Chatterjee, a currency strategist at Barclays Plc in New York. “That would be obviously bearish for the commodity currencies.”

The Canadian currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, weakened 1.2 percent to C$1.0146 per U.S. dollar at 2:16 p.m. in Toronto, compared with C$1.0021 yesterday. It plunged as much as 1.4 percent, the biggest intraday drop since Feb. 23. One Canadian dollar buys 98.56 U.S. cents. Government bonds rose.

Traders sold Canadian dollars to cover bets that the loonie would rise against the yen, said CJ Gavsie, managing director for foreign-exchange trading in Toronto at Bank of Montreal. The Japanese currency surged against all of its most-traded counterparts. The Canadian currency fell 2.2 percent to 90.83 yen, from 92.83 yesterday.

The loonie was headed for a five-day loss of 1.2 percent after rallying 0.8 percent and 1.5 percent in the previous two weeks. The currency traded stronger than parity with the U.S. dollar on April 6 for the first time since July 2008, and touched the strongest level since June 2008 two days ago.

Hu on Yuan

China has been proceeding with a “managed” floating exchange-rate mechanism “gradually as always,” President Hu Jintao said in a speech published on the Web Site of the Ministry of Foreign Affairs. A steady yuan helped stabilize the international financial system during the financial crisis, Hu said in a speech in Brazil yesterday, according to the Web site.

China’s cabinet raised minimum mortgage rates and down payment ratios yesterday for some home purchases, saying “more forceful” steps are needed to cool speculation.

Crude oil, Canada’s biggest export, fell as much as 3.5 percent, the biggest intraday decrease since Feb. 25, to $82.52 a barrel on the New York Mercantile Exchange. The nation depends on crude and other raw materials for half of its export revenue.

Goldman Sued

U.S. stocks dropped, halting a six-day rally, after the SEC sued Goldman Sachs for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression. The firm misstated and omitted key facts, the regulator said. Goldman Sachs said in a statement the charges “are completely unfounded.”

The Standard & Poor’s 500 Index fell 1.4 percent.

The Bank of Canada will meet April 20 to decide on interest rates. Governor Mark Carney signaled last month he’s open to raising the target lending rate as soon as June 1 as inflation and growth outpace forecasts.

Traders are assigning a probability of slightly more than 50 percent that the central bank will increase the benchmark interest rate by a quarter-percentage point, to 0.5 percent, at its June 1 meeting, according to Royal Bank of Canada. The firm is the nation’s largest lender.

“We do not strongly disagree with this assessment, although we still lean toward a July 20 hike,” Toronto-based David Watt, senior currency strategist at the RBC Capital Markets unit, wrote in a note to clients today. The risk of an earlier increase “remains significant,” he wrote.

Output Gap

Any changes to the central bank’s forecast for the output gap -- which measures the difference between the economy’s actual output and its potential output -- will be “pivotal,” Watt wrote. Traders expect the forecast to be brought forward from a January prediction of the gap’s closing by the third quarter of 2011. The absence of such a shift in language could push out longer-term interest-rate expectations and weigh on the currency, he wrote.

The one-year overnight index swap rate, a measure of the average overnight rate expected by investors during that time, touched 1.096 percent today, the highest on an intraday basis since December 2008, before sliding to 1.0360 percent.

Canada’s dollar gained 19 percent over the past 12 months against the greenback in the sixth-best performance among the 16 most-traded currencies tracked by Bloomberg. A rebound in commodity prices has boosted the dollars of raw-material exporters such as Canada, Australia and New Zealand.

Factory Sales

Canadian factory sales increased in February less than economists forecast, a report today showed. They rose 0.1 percent to C$44.1 billion ($44 billion), the eighth gain in nine months, Statistics Canada said in Ottawa. Economists surveyed by Bloomberg predicted growth of 1 percent.

The yield on Canada’s 10-year bond fell two basis points, or 0.02 percentage point, to 3.69 percent as the 3.75 percent security due in June 2019 rose 18 cents to C$100.44. It reached 3.738 yesterday, the highest since November 2008.

--Editors: Greg Storey, Dave Liedtka

To contact the reporters on this story: Chris Fournier in Montreal at; Mary Childs in New York at

To contact the editor responsible for this story: Dave Liedtka at

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