Canada’s Dollar Falls as Dodge Raises Possibility of Rate Cuts
Monday, November 19th, 2007Canada’s dollar fell to an almost six-week low after Bank of Canada Governor David Dodge said an interest rate cut is possible because of “risks” to economic growth.Dodge said the growing threats to the global economy and volatility in financial markets may affect the country’s benchmark lending rates. Interest rate futures suggest traders have increased bets that the central bank will cut the borrowing cost from 4.5 percent early next year.
“The central bank has started to take note of the downside risk coming from the trade side,” said David Watt, a senior currency strategist at RBC Capital Markets in Toronto. “The days of easy gains in the Canadian dollar are gone.”
Canada’s dollar weakened 1 percent to 98.19 Canadian cents per U.S. dollar in Toronto at 11:25 a.m. The Canadian dollar reached 98.88 Canadian cents per U.S. dollar on Nov. 16, its weakest since Oct. 9.
Canada’s trade surplus narrowed more than forecast in September to a nine-year low, as the country’s currency soared to parity with the U.S. dollar and hurt exports of machinery and industrial goods, a government report said on Nov. 9.
“It’s quite clear the downside risks to world growth have increased” since policy makers from the Group of Seven nations met in Washington a month ago, Dodge told reporters during a conference call from South Africa. “That clearly poses a risk, which we’re going to have to take into account in setting our own policy.” Dodge is in South Africa for meetings with finance ministers and central bankers from the Group of 20 nations.
Interest-Rate Futures
Bankers’ Acceptance Futures for March fell 13 basis points, or 0.13 percentage point, to 4.29 percent. The futures yielded 4.76 percent on Oct. 10.
The futures have settled at a three-month lending rate averaging 16 basis points above the central bank’s target since Bloomberg started tracking the data.
International investors reduced holdings of Canadian securities for a fifth consecutive month in September, with the decline exceeding economists’ forecasts, government figures showed.
Investors abroad sold a net C$5.2 billion ($5.3 billion) of Canadian securities, Statistics Canada said today in Ottawa. Foreign portfolio investors sold C$2.9 billion of Canadian stocks during the month, and C$2.6 billion of Canadian bonds.
The currency extended its losses after National Bank of Canada, the country’s sixth-largest bank, said it plans to take a C$365 million ($374 million) writedown in the fourth quarter for its investments in Canadian asset-backed commercial paper.
Asset-Backed Securities
National Bank’s action is the largest among five Canadian banks that have said they’ll reduce the value of their asset- backed securities in the quarter. The other lenders, including Royal Bank of Canada and Bank of Montreal, had combined writedowns of C$807 million on commercial paper and securities tied to the U.S. subprime mortgage market.
Citigroup Inc., the largest U.S. bank by assets, was lowered to “sell” by a Goldman Sachs Group Inc. analyst who predicted that the lender’s writedowns of collateralized debt obligations will total $15 billion over the next two quarters.
The yield on the two-year Canadian government bond, more sensitive than longer maturities to interest-rate policy change, fell 18 basis points, the most since May when the bond started trading, to 3.66 percent. The price of the 4.25 percent security maturing in December 2009 rose 34 cents to C$101.15. Bond prices move inversely to yields.
“There has been a lack of liquidity in the market,” said Dean Popplewell, a currency analyst in Toronto at Oanda.com, an online foreign-exchange trading firm. “People are looking at the bigger picture, and taking shelter in the fixed-income market.”