Risk aversion pushes Canadian dollar lower; commodity prices retreat

TORONTO – The Canadian dollar declined Tuesday as traders avoided riskier assets amid a number of concerns including the failure of Japan’s central bank to unveil more measures to boost the country’s economy and a court challenge on the legality of the European Central Bank’s approach to the euro crisis.

The commodity-sensitive loonie fell 0.48 of a cent to 97.66 cents US amid lower prices for oil, copper and gold. The currency had rallied over the last two days on data showing strong job creation last month and rising housing starts.

The Bank of Japan started a big monetary stimulus earlier this year in an attempt to get the economy out of a two-decade stagnation. And there had been expectations it would announce new measures Tuesday to temper the rise in government bond yields by extending the duration on its ultra-low-interest rates to banks. Instead, the bank’s policy board merely upgraded its economic assessment and the Japanese yen strengthened at least one per cent against all its 16 major peers.

Traders also looked to the start of a two-day hearing by Germany’s constitutional court on the legality of a key European Central Bank program that has been credited with calming the 3 1/2 year-old euro debt crisis. The Federal Constitutional Court is considering arguments against the ECB’s offer to buy government bonds and lower borrowing costs for indebted countries.

Opponents of the bond-buying program say the program oversteps the ECB’s mandate, which forbids it from financing governments.

In the background were worries about the strength of China’s economic recovery and speculation over whether the U.S. Federal Reserve will start to taper off some of its bond purchases.

Data released last weekend showed China’s export growth slowed dramatically in May to just one per cent from a year ago, which was the slowest increase since July 2012. Imports slipped 0.3 per cent from year-earlier levels, raising worries that domestic demand has weakened considerably in the world’s second-biggest economy.

Meanwhile, investors have been closely monitoring developments in the U.S. and whether the economic picture has improved enough for the Federal Reserve to reduce the amount of financial assets it buys in the markets — so-called tapering. Speculation that it will has eased somewhat after last week’s slightly better-than-expected U.S. jobs report for May.

The quantitative easing program, involving the purchase of US$85 billion of bonds each month, has kept interest rates low and also helped fuel a strong rally on U.S. stock markets.

Commodity prices backed off sharply Tuesday morning with July crude on the New York Mercantile Exchange down $1.30 to US$94.47 a barrel.

July copper retreated for a fourth day, down five cents to US$3.19 a pound. And August bullion dropped $12.80 to US$1,373.20 an ounce.