Loonie plummets, then partly lifts

The loonie plunged 2.25 cents to near parity in early morning trading, then in a matter of hours recovered more than half the loss before eventually closing down 1.19 cents at 101.63 cents US.

And the volatility will likely continue, say analysts, until it is known whether Japanese nuclear technicians will be successful in bringing their overheating reactors under control.

The uncertainty has flipped the fundamentals of currency trading on its head, said Dennis Gartman, a U.S. trader and author of the influential Gartman Letter.

“It’s just a flight to safety. When all else fails go to the U.S. dollar, or go to the Swiss franc,” he said.

“Right now any fundamentals you talk about are laughable except for panic. It’s a rush away from the things people were rushing into up until Friday morning.”

Nearly all the world’s major currencies experienced as hectic a day as the loonie, with the Australian dollar falling even further, while U.S., Swiss and Japanese denominations rallied.

The yen surge was anything but a flight to safety. It had been edging up before the crisis but has taken off ever since as insurance companies and others seek to “repatriate” the currency to pay claims and for reconstruction.

CIBC economist Peter Buchanan points out that a similar repatriation occurred after the 1995 Kobe quake, when the yen appreciated an astounding 20% against the U.S. dollar in a matter of months.

“We don’t think we’re going to get quite as sharp an appreciation this time because the Bank of Japan has been providing liquidity,” Buchanan said. “They are not likely to tolerate a sharp, further rise just because the export sector there is already labouring under the effects of the earthquake.”

The flight to safety phenomenon has derailed the Canadian currency before, most recently in the fall of 2007 when the financial crisis that began in the U.S. and resulting global recession saw traders back away from commodity currencies, particularly the loonie.

At the time, the Canadian dollar slid from a record high $1.10 US in November of 2007 to as low as 76.53 cents US 16 months later.

Analysts are not expecting that magnitude of a swoon this time because even the worst-case scenarios don’t foresee the Japanese emergency lasting for such an extended period or having the capacity to plunge the world into another deep recession.

Analysts were reluctant to forecast the near-term outlook for the loonie because the situation in Japan is so unpredictable.

“What we’re seeing is the market is repricing the outlook for Asian growth so … Japan, being the third-largest economy in the world, it’s going to put some downward pressure on global growth,” said Camilla Sutton, chief currency strategist at Scotia Capital.

The uncertainty was also reflected in equity markets, with Japan’s benchmark Nikkei 225 stock average taking the biggest hit, falling more than 1,000 points, or 11%, after a six per cent decline Monday.

Stock markets in Toronto and New York were well off the worst levels of the session but the TSX closed down about 0.5% and the Dow industrials about one per cent.

Meanwhile, the April crude contract on the New York Mercantile Exchange lost $4.01 to US$97.18 a barrel. Prices had already been under pressure on concerns that Japan will be using much less oil because of the economic impact of last Friday’s massive earthquake and tsunami.

Demand concerns pushed copper down five cents to US$4.14 a pound, far below recent highs of more than US$4.60.

Bullion prices also retreated with the April contract in New York down $32.10 at US$1,392.80 an ounce.

“It’s very hard to quantify what’s transpiring and very hard to quantify the risk in the system and there’s a tremendous amount of misinformation circulating about,” Sutton said.

Gartman said it is impossible to predict when the panic would end.

“It will stop when it stops … that’s the best that can be said and that’s 35 years of experience speaking,” he said.

“It is patently illogical for the Canadian dollar to get weak that this point, because eventually the rebuilding process in Japan is going to require Canadian exports of plywood, coal, crude oil, food, copper — all those things that lift the Canadian dollar but right now it doesn’t matter.”