Canada dollar falls as policy makers’ easing debate trims demand

January 16, 2013 05:04 AM

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The Canadian dollar fell against most of its major peers as government officials in Russia and Japan criticized monetary policies that have devalued major currencies in an attempt to spark economic growth.

It dropped the most in a week against its U.S. counterpart as a Russian central bank official warned the world is on the brink of a “currency war” after the Japanese economy minister said yesterday currency weakness sparked by central-bank policy could hurt consumers. Stocks declined while a government report showed inflation in the U.S. was unchanged last month.

“The Canadian dollar would naturally perform better when there is a move toward risky assets,” said Jane Foley, senior currency strategist at Rabobank International, by phone from London. “This liquidity provided by central banks has pushed people into taking very complacent attitudes about the position of the world, and I think what we’ve seen in the last day or two is the market may be stopping for breath.”

The Canadian dollar, known as the loonie for the image of the waterfowl on the C$1 coin, declined 0.1% to 98.56 cents per U.S. dollar at 10:41 a.m. in Toronto. One loonie buys $1.0146.

Oil, Stocks

Futures on crude oil, Canada’s largest export, rose 0.6% to $93.86 per barrel and the Standard & Poor’s 500 Index of stocks fell 0.1%.

Options traders are almost the least bearish on the Canadian dollar as they’ve been in two years. The three-month so-called 25-delta risk reversal rate, which measures the premium charged for the right to buy the U.S. dollar against the loonie versus contracts to sell, traded at 0.8% today, close to the 0.7% level touched Dec. 12 that was the lowest since November 2010.

Canada’s benchmark 10-year bonds rose, with yields falling two basis points, or 0.02 percentage point, to 1.89%. The 2.75 %note due in June 2022 rose 13 cents to $107.32.

The Bank of Canada will auction C$3.3 billion ($3.4 billion) of two year notes maturing in May 2015 today.

The Canadian dollar fell after Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said Japan’s policy of weakening the yen may prompt other countries to do the same, sparking a currency war. Jean-Claude Juncker, prime minister of Luxembourg and chair of the Group of 20, complained the euro was “dangerously high” yesterday and Norwegian Finance Minister Sigbjoern Johnsen said a strong krone challenges the economy.

European Central Bank policy maker Ewald Nowotny said the euro exchange rate is “not a major concern.”

Currency Views

“The volatility comes on the back of the rhetoric that’s coming primarily from Europe, but even before that from Asia,” said Jack Spitz, managing director of foreign exchange at the National Bank of Canada by phone from Toronto. “Juncker’s comments, Nowotny’s comments yesterday and overnight are creating volatility in the intraday market from a euro perspective and it’s affecting a number of currencies, not least of which is the Canadian dollar.”

A reading of the cost of living in the U.S. was little changed in December, indicating the U.S. economy is not growing fast enough to spark fears of inflation.

The German government cut its growth forecast for Europe’s biggest economy on cooling demand for exports. German gross domestic product growth will slow to 0.4% this year from 0.7% in 2012, the Economy Ministry said in its annual report, compared with a previous forecast for 1% expansion.

The loonie has fallen 1.3% during the past six months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The greenback has dropped 4.4%.

Bloomberg News

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