Loonie Loses 3% as Traders See Carney Pushing Quantitative Ease

By Chris Fournier

April 6 (Bloomberg) -- Foreign-exchange traders are stepping up bets Bank of Canada Governor Mark Carney will join Japanese, Swiss, U.K. and U.S. central bankers and dilute the nation’s currency by embracing quantitative easing.

Among the world’s most traded currencies, only the yen, pound and U.S. dollar performed worse in March than Canada’s dollar as central bankers began printing money last month to buy debt assets after exhausting other monetary-policy tools. The New Zealand dollar, which like Canada’s tends to track fluctuations in prices of raw materials, had its best month in at least 20 years in March, according to data compiled by Bloomberg.

Strategists at BNP Paribas, Bank of America-Merrill Lynch and Morgan Stanley advise investors to sell the so-called loonie before the central bank’s policy report on April 23. Carney has pledged to lay out a plan that would flood banks with cash to halt the hoarding of capital and expand lending. The greenback, pound and Swiss franc plunged as much as 3.4 percent on the announcement of similar steps to ignite growth.

“The precedent is a haircut right off the currency,” said David Watt, senior currency strategist in Toronto at RBC Capital Markets, Canada’s largest foreign-exchange trader by volume. “As we get through this month, we’re leaning toward Canadian dollar short positions.” A short position is a bet a currency will depreciate.

Canada’s currency will fall 3.3 percent to C$1.27 to the U.S. dollar by July, from C$1.2298 on April 3, according to the median forecast in a Bloomberg News survey of 40 economists and analysts. The loonie, so called for the aquatic bird on the one- dollar coin, rose 1 percent last week to 81.31 U.S. cents.

Worst Performers

The franc plunged the most ever against the euro on March 12, tumbling 3.3 percent, when the Swiss National Bank began intervening to weaken the currency and outlined plans to buy corporate bonds. On March 4, the Bank of Japan offered to buy 150 billion yen ($1.5 billion) in company debt from lenders, its first ever such operation. The yen has since lagged behind all of the 16 most traded currencies.

The Bank of England cut its key rate on March 5 to 0.5 percent, the lowest level since the bank was founded in 1694, and said it will print money to buy as much as 150 billion pounds ($222.6 billion) in government and corporate bonds. The pound fell 4.6 percent against the euro last month, after losing 23 percent in 2008.

Federal Reserve officials on March 18 unveiled plans to buy $300 billion in government securities, sending the U.S. dollar 3.4 percent lower against the euro, a record one-day decline.

‘On The Table’

“Anytime quantitative easing is even entertained, markets react negatively to the currency,” said Sacha Tihanyi, a strategist in Toronto at Scotia Capital Inc., a unit of Canada’s third-largest bank. “The threat of QE as a policy option may keep the market a little less bullish on the Canadian dollar as long as it is still on the table.”

The Canadian currency plummeted a record 18 percent last year as the global financial crisis reduced demand for raw materials. Export revenue from energy products including crude oil, natural gas and coal plummeted in January by 30 percent to C$6.54 billion from the same month a year earlier, according to Statistics Canada. Energy exports comprise about a quarter of the total.

Oil has rebounded since reaching $32.40 a barrel in December, the lowest in almost five years, reaching $52.51 on April 3.

Kiwi Correlation

“I’m absolutely not concerned” about the effect of quantitative easing, said Francois Barriere, vice president business development for international markets at Laurentian Bank of Canada in Montreal. “It’s never going to be as much as they’re doing in the U.S. and it won’t be enough to justify a weaker Canadian dollar.” He predicts the loonie will strengthen to at least C$1.20 in three months.

The currency climbed 11 percent against the New Zealand currency from the September collapse of Lehman Brothers Holdings Inc. until the Bank of Canada cut its key overnight rate to a record low 0.5 percent on March 3. The central bank also said while cutting rates that it was considering using quantitative easing. The loonie has since given up its gains, falling 11 percent against the kiwi.

The correlation coefficient between the kiwi, as the New Zealand dollar is known, and the loonie has dropped to 0.88 when measured against the yen from 0.92 before the decision, according to Bloomberg data. A coefficient of one would indicate the currencies move in lock step. Both currencies track movements in commodity prices and equities, proxies for investors’ appetite for risk.

Oil Sands

Oil prices have dropped almost $100 a barrel since reaching a record $147.27 in July, prompting companies such as Royal Dutch Shell Plc, based in The Hague, and StatoilHydro ASA, Norway’s biggest oil producer, to defer or cancel at least 14 projects this year in Alberta’s oil sands.

Canada’s dollar reached parity with its U.S. counterpart for the first time in three decades in September 2007 following a 60 percent climb in the preceding five years that was fueled by rising prices for commodities, which account for 56 percent of Canada’s export revenue.

Canada has 179 billion barrels of oil reserves, the most in the world outside Saudi Arabia. All but six billion are locked in Alberta’s oil sands, a mixture of sand, water, clay and bitumen that’s too heavy to use without being heated. Oil must be at $65 a barrel for new oil sands projects to be viable, according to estimates by the Canadian Association of Petroleum Producers.

‘Biased Toward Weakness’

Hans-Guenter Redeker, the London-based global head of currency strategy BNP Paribas recommends selling the Canadian dollar against the Australian dollar, citing Canada’s exposure to the U.S. economy, the shrinking automobile industry and “pressure” on the price of gold.

“The Canadian currency for the time being is going to stay biased toward weakness,” said Ron Leven, an executive vice president and senior currency strategist at Morgan Stanley in New York. “The market is expecting quantitative easing. We’re thinking about going short the Canadian dollar.”

Bank of Canada’s Carney said in a March 14 interview in Horsham, England, where he attended a meeting of Group of 20 officials, that moves such as the purchase of assets from investors are an option for the central bank and may be part of a proposed framework to combat a deepening recession.

‘Not Preordained’

Although the bank is considering quantitative and credit easing policies, “their use is not preordained,” Carney said in an April 1 speech in Yellowknife, Northwest Territories.

Record job losses and trade deficits this year signal Canada’s recession is deepening. Exports to the U.S., destination of 76 percent of the total last year, are slumping as Americans cut home and car purchases. Canada’s economy shrank 0.7 percent in January, the sixth straight contraction.

Plummeting car sales at General Motors Corp. and Chrysler LLC and speculation the companies may file for bankruptcy may also weigh on the Canadian dollar.

Car and truck manufacturing provides 440,000 direct and indirect jobs in Canada, according to the Web site of the industry’s largest labor union. Revenue from Canada’s automotive exports, 13 percent of the total, dropped more than a fifth last year to C$61.1 billion, from C$77.3 billion in 2007, Statistics Canada said in its latest Annual Review.

“Car sales are a disaster,“ said Daniel Tenengauzer head of global foreign exchange strategy in New York at Bank of America-Merrill Lynch. “It’s a combination of commodities and cars. We recommend selling the Canadian dollar.”

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