Cdn dollar downwards....
Loonie falls by more than 1¢
TAVIA GRANT
Thursday, January 05, 2006
The Canadian dollar posted its biggest one-day decline in six months Thursday as natural gas prices retreated and a weaker-than-expected business gauge rattled confidence in the strength of the economy.
The loonie fell 1.26 cents (U.S.) to 85.95 cents, its biggest drop since July 1 and down from Wednesday's official Bank of Canada close of 87.21 cents, the highest close in 14 years.
The drop began as prices for some commodities, such as oil, natural gas and gold, eased, a move which could weigh on Canada's resource-heavy economy. Natural gas prices slid below $10 per 1,000 cubic feet on the New York Mercantile Exchange, putting the contract a sizable 40 per cent below its peak on Dec. 13.
The dollar fell even further after the Canadian purchasing managers index declined more than economists had expected.
"It was under pressure earlier on drifting commodities prices, particularly natural gas," said Shaun Osborne, chief currency strategist at Scotia Capital. "Some soft numbers from the purchasing managers index helped give it a bit of a shove lower."
George Davis, Royal Bank of Canada's chief foreign exchange technical analyst, said trading volumes today rebounded from the holiday lull.
The Canadian dollar had strengthened in recent weeks, even as natural gas prices slumped. Today's move was partly a catch-up by investors to bring the loonie more in line with lower gas prices, Mr. Davis said.
"In the past six months to a year, natural gas prices have had a higher correlation to the dollar than crude oil prices," he said. In the past few weeks, however, "there's been a bit of a disconnect," he said.
The purchasing managers index, compiled by the Ivey School of Business at the University of Western Ontario, fell to 48.3 in December, its lowest level since July 2003. Economists polled by Bloomberg News had expected a reading of 62.7. A number below 50 indicates purchasing decreased in the month.
Mr. Osborne expects the loonie to stabilize at these levels in the near term, after the currency rose 3.4 per cent last year. He said a tighter race in the Canadian federal election may be prompting some investors to cut their exposure to the Canadian dollar.
Canadian voters head to the polls on Jan. 23, with recent polls showing the Conservative and Liberal parties in a dead heat.
Investors are now awaiting Friday's reports on December employment, due on both sides of the border, for more clues on the economy. A stronger-than-expected Canadian jobs report, after a big sell-off today, could add some oomph to the loonie, RBC's Mr. Davis said.
Analysts polled by Bloomberg News expect Canada added about 20,000 jobs last month. The U.S. economy is expected to have created 200,000 jobs.
The loonie also weakened against other major currencies Thursday, such as the euro, the British pound and the Japanese yen.