Although the bank is considering quantitative and credit easing policies, “their use is not preordained,”

TO BE NOTED: From Bloomberg:

Loonie Loses 3% as Carney Pushes Quantitative Ease (Update1)

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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.

Worst Performers

Canada’s currency will fall 3.4 percent to C$1.27 to the U.S. dollar by July, from C$1.2286 today, 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.

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.

‘On The Table’

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.

“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.’’

"The dollar doesn’t have to go south if all the economies reflate at the same time.”

I like William Gross, so here's a chance to quote him from Bloomberg:

"By Ye Xie

Dec. 11 (Bloomberg) -- The dollar fell to a six-week low against the euro and yen as the cost of borrowing in the U.S. currency tumbled, signaling less demand for year-end funding.

The greenback also dropped after a report showed the U.S. trade deficit unexpectedly widened in October. The Swiss franc dropped against the euro and yen after the central bank reduced its main interest rate to a four-year low of 0.5 percent.

“Dollar liquidity and funding concerns are starting to fade,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second largest bank. “These factors have been important sources of support for the dollar in the past few months.”

The U.S. currency fell 1.7 percent to $1.3243 per euro at 8:40 a.m. in New York, from $1.3023 yesterday. It dropped 1.6 percent to 91.28 yen from 92.76. The euro traded at 120.77 yen, compared with 120.78 yen.

The cost of borrowing in dollars for three months in London fell to the lowest level in more than four years. The London interbank offered rate, or Libor, that banks say they charge each other for such loans slid 0.1 percentage point to 2 percent, the lowest level since September 2004, British Bankers’ Association data showed. That’s still one percentage point above the Fed target, up from an average of 16 basis points in the seven years to August 2007, when the credit freeze began.

“From a fundamental basis, there’s a case for avoiding the dollar,” said Adrian Schmidt, a London-based senior foreign- exchange strategist at the Royal Bank of Scotland Plc, the fourth-biggest currency trader. “For the moment the dollar’s on the back foot.”

How interesting.

"The ICE’s Dollar Index, which tracks the greenback against the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Sweden’s krona, fell 1.2 percent at 84.449, below the 55-moving-day average of 84.5, as traders took advantage of the low liquidity to test how far it may fall, Hardman said. They will drive the dollar to $1.345 per euro this year, he said.

The dollar has gained 11 percent against the euro in 2008 as the credit-market seizure and $980 billion of losses on mortgage-related securities worldwide led investors to repatriate overseas investments to the U.S. and seek funding in the greenback.

The yen gained versus all 178 currencies tracked by Bloomberg this year as the global recession encouraged Japanese investors to bring funds back home and global equities plunged.

Japan’s currency jumped 21 percent versus the dollar, 34 percent against the euro and 66 percent against Brazil’s real as the financial crisis prompted investors to reverse carry trades, in which they purchase higher-yielding assets funded in countries where borrowing costs are lower. Japan’s benchmark rate of 0.3 percent is the lowest among major economies.

The U.S. trade deficit expanded 1.1 percent to $57.2 billion in October from a revised $56.6 billion in September, the Commerce Department said today in Washington. The gap was projected to narrow to $53.5 billion from an initially reported $56.5 billion in September, according to the median forecast in a Bloomberg News survey of 70 economists.

The U.S. budget deficit in November swelled to $164.4 billion, from $98.2 billion in the year-earlier period, as the government used taxpayer money to shore up the financial system by buying stakes in banks, the Treasury Department reported yesterday. Government revenue fell 4.2 percent, while spending soared 24 percent."

Let's see what Gross says:

"The dollar may extend its decline as the U.S. government increases its budget deficit by spending “trillions of dollars” to revive the economy, said Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California.

“There’s some risk” for the dollar to weaken, Gross said in an interview on Bloomberg Television yesterday. “It is fair to say other economies are doing much the same thing. The dollar doesn’t have to go south if all the economies reflate at the same time.”

Let's hope for "reflation" ( Another term. Yikes. ) , I suppose.