Canada’s Dollar Weakens as Carney Named Bank of England Governor

By John Detrixhe - Nov 27, 2012 6:06 AM GMT+0800

The Canadian dollar fell from almost a two-week high against its U.S. counterpart as Bank of Canada Governor Mark Carney was named chief of the Bank of England, spurring speculation over who will replace him in Ottawa.

The currency weakened as risk appetite waned amid concern that Europe is struggling with its debt crisis and a budget deadlock may push the U.S. into recession. Crude oil, Canada’s biggest export, and stocks fell. Bonds rose. Finance Minister Jim Flaherty said the government will soon form a special committee to recruit Carney’s replacement.

“It creates tremendous uncertainty for Canada in the sense that we don’t know who the next head of the Bank of Canada will be,” Camilla Sutton, chief currency strategist in Toronto at Bank of Nova Scotia (BNS)’s Scotiabank, said in a telephone interview. “Uncertainty typically isn’t very good for currency markets, so I would expect the Canadian dollar to weaken off.”

Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, depreciated as much as 0.3 percent to 99.60 cents per U.S. dollar before trading little changed at 99.31 cents at 5 p.m. in Toronto. It gained earlier to 99.18 after reaching 99.16 cents on Nov. 23, the strongest level since Nov. 7. One Canadian dollar buys $1.0065.

A gauge of volatility reached the lowest in more than a decade before rising as the currency weakened. Implied volatility for three-month options on the U.S. dollar versus the loonie touched 5.6425 percent, the least since May 2001, before rising to as high as 5.8675 percent. The 10-year average is 9.98 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

‘More Volatility’

“You’re going to get more volatility,” Joseph Trevisani, chief market strategist at WorldWideMarkets Ltd. In Woodcliff Lake, New Jersey, said in a phone interview. “There’s too many potential things that can happen over the next two or three months that will push the Canadian dollar one way or another.”

Canada’s government bonds rose, with securities due in 10 years and more gaining for the first time in six days. The yield on benchmark 10-year debt dropped three basis points, or 0.03 percentage point, to 1.76 percent as the price of the 2.75 percent securities maturing in June 2022 increased 23 cents to C$108.64. Thirty-year bond yields decreased two basis points to 2.34 percent, and two-year note yields fell two basis points to 1.1 percent.

Carney, 47, a former Goldman Sachs Group Inc. managing director, was named BOC governor in 2008. He also heads the Group of 20’s Financial Stability Board, where he’s pushed for tougher regulations for global lenders.

First Foreigner

He will become the first foreigner to run the 318-year-old BOE as it absorbs new powers to oversee banks. Carney previously signaled he wasn’t a candidate for the job.
His move to the U.K., effective in July, will hurt the Canadian dollar “long term, but in the short term, dollar- Canada should stay around the parity level,” Peter Gorra, chief dealer for BNP Paribas SA in New York, said in an interview on Bloomberg Television’s “Lunch Money” with Sara Eisen.

“You’ll see some volatility in Canadian bonds and the loonie as people try to get a handle on what it could mean, but ultimately I don’t see much of a difference,” Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, said in a telephone interview. “The Finance Ministry and the bank are likely to promote an individual with similar characteristics to Carney where he’s going to remain somewhat on the hawkish side.”

Carney has kept Canada’s benchmark interest rate at 1 percent since September 2010 to support the economy. He said earlier this year tighter monetary policy “may become appropriate” as the nation’s economy moves toward full output.

Successor Selection

Flaherty said in a statement posted on the Finance Department’s website that the “usual practice” for selecting and appointing the Bank of Canada’s governor will be followed. The bank’s board of directors will form a special panel of independent directors to recruit the next chief, he said.
BOC Senior Deputy Governor Tiff Macklem is the most likely successor to Carney as head of the country’s central bank, economists and money managers said.

Macklem, 51, is “a natural choice,” said Sebastien Lavoie, economist at Montreal-based Laurentian Bank and former Bank of Canada employee. “He knows his way around in Ottawa.”
The loonie also weakened as crude oil for January delivery lost 0.5 percent to $87.80 a barrel in New York, and Standard & Poor’s GSCI index of 24 raw materials declined 0.4 percent. Commodities including oil account for about half of Canada’s export revenue. The S&P 500 Index lost as much as 0.8 percent before ending the day down 0.2 percent.

Resistance Level

The greenback “was unable to muster enough momentum” to sustain an advance beyond 99.52 cents, a former support level that has become a key resistance level, Matthew Weller, a technical analyst in Grand Rapids, Michigan, at the online broker GFT Markets, wrote in a client note. Support is an area on a chart where buy orders may be clustered, and resistance is where there may be sell orders.

Euro-area finance ministers met in Brussels to try to clear the next installment of rescue aid to Greece, where the region’s sovereign-debt crisis began three years ago, and discuss ways to keep the country a solvent member of the currency bloc. An 11- hour overnight session last week failed to produce decisions.
In the U.S., lawmakers prepared to debate in a budget showdown. If they can’t reach agreement, $607 billion in automatic spending cuts and tax increases starting Jan. 1 will cause the world’s biggest economy to contract 0.5 percent next year, according to the Congressional Budget Office. The situation is known as the fiscal cliff.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net