Canada dollar falls below parity as investors lose risk appetite

Canada’s dollar slid below parity with its U.S. counterpart for the first time in a month amid a surge in risk aversion and a drop in stocks.

The currency touched its weakest level since January in volatile trading as investors sought a refuge in the greenback on concern Greece is moving closer to default. Canadian Finance Minister Jim Flaherty said he won’t do more fiscal stimulus unless something “dramatic” occurs in the global economy.

“The main themes continue to play out: concern over the situation in Europe and risk off,” said Matthew Perrier, director of foreign exchange at Bank of Montreal, by telephone today from Toronto. “The underlying situation remains tilted toward a negative risk scenario. One would expect the Canadian dollar to weaken.”

The currency dropped as much as 0.6 percent to C$1.0027 per U.S. dollar, the weakest level since Jan. 31, before trading little changed at 99.76 cents at 1:38 p.m. in Toronto, compared with 99.67 Sept. 9. It was last on a one-for-one level with the greenback on Aug. 9. One Canadian dollar buys $1.0024.

One-month implied volatility on the currency pair reached 11.6 percent today, the highest level since Aug. 15.

The Canadian and U.S. dollars are among the biggest losers this year in a basket of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The two nations have the world’s largest trading relationship. The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, has lost 2.1 percent, while the U.S. dollar has dropped 2.2 percent.

Euro Falls

The euro dropped to the lowest since 2001 against the yen on speculation German Chancellor Angela Merkel is preparing for a Greek default. The dollar strengthened to the highest level since February versus the 17-nation currency as fresh Greek austerity plans failed to calm financial-market stress.

Government bonds due in less than 20 years fell, pushing up yields after they reached record lows earlier. Ten-year note yields rose two basis points, or 0.02 percentage point, to 2.13 percent after earlier dropping to 2.089 percent, the lowest since at least 1989. Thirty-year bond yields traded at 2.80 percent, down less than 1 basis point, after earlier falling two basis points to 2.789 percent, the least since at least 1990.

Flaherty, speaking to reporters today in Whitby, Ontario, downplayed the likelihood of further stimulus.

“What’s been done before can be done again if it’s essential, but it’s not what we expect,” the finance minister said. “What we expect is continuing modest growth in the Canadian economy through the end of this year and in 2012.”

‘Challenging Times’

Flaherty declined to comment specifically on the Canadian dollar and its dip below parity.

“These are challenging economic times; we’re going to see some volatility,” he said.

The government will sell C$3.5 billion ($3.51 billion) in two-year notes on Sept. 14, according to a central bank statement. The 1.5 percent debt will mature in November 2013.

Canada’s net international debt increased for a ninth straight quarter in the April-June period, rising by C$5.1 billion to C$217.8 billion, as foreigners continued to buy Canadian bonds, Statistics Canada said in Ottawa today.

The MSCI World Index of stocks declined 2.2 percent, after falling 3 percent on Sept. 9. The Canadian dollar’s correlation co-efficient with the measure of equities in developed nations was 0.84 today. A reading of 1 would indicate the securities move in lock-step.

Crude oil, Canada’s biggest export, fluctuated. October futures fell as much as 2.6 percent to $85 a barrel in New York and rose as much as 2 percent to $88.95.

‘Dragging Canada Up’

“The U.S. dollar is doing better against Europe, dragging Canada up against the crosses,” said BMO’s Perrier. “That has tempered the ascent through parity,” he said, meaning the Canadian dollar is outperforming non-U.S. dollar currencies, limiting its losses versus the greenback.

The 14-day relative strength index for the U.S. dollar against the Canadian dollar was 60.9 today. A reading of 70 would indicate the security may have advanced too quickly and is due to fall.

The premium charged for the right to buy the U.S. currency versus the Canadian dollar in one month over contracts to sell reached 2.2 percentage points today, the highest level since Aug. 15, risk-reversal rates show. The rate was as high this year as 2.61 percentage points last month and as low as 0.67 percentage points in March, according to Bloomberg data.

Bank of Canada

Canada’s dollar depreciated 1.1 percent last week, the second straight five-day decline. The Bank of Canada on Sept. 7 kept its target rate for overnight lending between commercial banks at 1 percent, where it’s been for a year. Policy makers said there’s less need for a rate increase as Europe’s sovereign-debt crisis and a slow U.S. economic rebound hobble the global recovery.

The U.S. consumes about three quarters of Canada’s exports. The two nations generate $1 trillion annually in bilateral trade and investment, and the export of goods to the U.S. accounts for about a fifth of Canada’s gross domestic product, according to the Web site of the U.S. Embassy in Ottawa.