Canada’s Dollar Weakens on Oil’s Drop, ‘Political Shenanigans’

By Chris Fournier

Dec. 4 (Bloomberg) -- Canada’s currency fell the most in two weeks as oil prices dropped to the lowest in almost four years and the prime minister prepared to meet the governor general in a bid to save his seven-week-old government.

Crude oil’s decline “doesn’t help, nor do the political shenanigans,” said David Watt, a senior currency strategist at RBC Capital Markets in Toronto. “There are more than enough ingredients for some drama without the need for the folks in Ottawa to kick up a fuss.”

The Canadian dollar dropped as much as 1.2 percent to C$1.2676 per U.S. dollar, from C$1.2521 yesterday. The currency fell 3.2 percent on Nov. 20. It traded at C$1.2656 at 10:17 a.m. in Toronto. One Canadian dollar buys 79.05 U.S. cents.

RBC Capital predicts the Canadian dollar will weaken to C$1.27 by year-end.

Crude oil for January delivery dropped as much as $1.49, or 3.2 percent, to $45.30 a barrel on the New York Mercantile Exchange. That’s the lowest since Feb. 9, 2005. Crude oil accounts for about a tenth of Canada’s export revenue.

Crude may dip below $25 a barrel next year if the recession that’s slashing fuel demand around the world spreads to China, Merrill Lynch & Co. said.

Since July 1, the Canadian dollar has weakened 0.3 cents for every $1 decline in the price of oil, according to Eric Lascelles, Toronto-based chief economics strategist at TD Securities Inc., a unit of Canada’s second-largest bank.

Canadian Prime Minister Stephen Harper will ask the country’s head of state, Governor General Michaelle Jean, to suspend Parliament as he tries to fend off a challenge from opposition parties seeking to bring down his government.

‘Imbroglio in Ottawa’

“In currency terms, there’s little doubt the imbroglio in Ottawa is a contributing factor in maintaining a long U.S. dollar bias,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, wrote in a note to clients yesterday. A long position is a bet that a currency will gain.

Since the two largest opposition parties agreed Dec. 1 to form a coalition to accelerate a stimulus package for the economy, Canada’s dollar has weakened 1.9 percent.

Harper’s party was re-elected on Oct. 14 with the country’s third straight minority government. The government hopes “the governor general will grant a timeout,” Jay Hill, the Conservative lawmaker responsible for day-to-day affairs in the legislature, told the Canadian Broadcasting Corp.

‘Power Struggle’

“The uncertainty is not good for the Canadian dollar,” said Steven Butler, director of foreign-exchange trading at Scotia Capital Inc. in Toronto. “The politicians need to be focused on the economy, not a power struggle.”

Statistics Canada and the U.S. Labor Department are due to release employment data tomorrow. Canadian employers shed 25,000 jobs in November, according to the median forecast of 21 economists surveyed by Bloomberg News.

The yield on the two-year government bond declined four basis points, or 0.04 percentage point, to 1.57 percent. The price of the 2.75 percent security due in December 2010 rose 7 cents to C$102.31.

The 10-year note’s yield fell six basis points to 3.11 percent. The price of the 4.25 percent security maturing in June 2018 climbed 46 cents to C$109.32.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net