Forex Market Braces For Flows, With Cnooc-Nexen Set To Close

   By Karen Johnson 
 

With Cnooc's Ltd.'s (CEO) hefty $15.1-billion takeover of Nexen Inc. (NXY) set to close this week, players in the foreign-exchange market are bracing for the fallout.

Big foreign merger-and-acquisition deals typically give a boost to a country's currency, by triggering a sharp surge in demand. And the bigger the deal, the stronger the boost.

Chinese-owned Cnooc's bid for Nexen is the fifth-largest acquisition of a Canadian company on record, according to Dealogic.

Still, the price tag isn't massive by global standards, and some analysts are skeptical the resulting flow will move the currency in a big way.

The demand for Canadian dollars created as shareholders convert their U.S.-dollar payouts to loonies is likely already factored into the current exchange rate, analysts say.

"But we've been surprised before with repatriation flows from Canadian-based shareholders on other deals," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. "And this is the week."

The biggest surprise came after Anglo-Australian mining giant Rio Tinto's (RIO.AU) $38.1-billion buy of Montreal-based Alcan in 2007, a deal that -- like Cnooc's -- was priced in U.S. dollars.

When the deal closed, Alcan's mostly Canadian shareholders were paid in dollars, and dumped them en masse for loonies.

The U.S. dollar plummeted, dropping about five Canadian cents and trading down to C$0.9059, a low never seen before, or since.

Of course, that takeover deal was far bigger, the market was more thinly traded, and Alcan's shareholders were predominantly Canadian.

Jack Spitz, managing director of foreign exchange, financial markets and derivatives at National Bank in Toronto, estimates Canadian-based shareholders may only account for about $4 billion of the $15.1 billion total being paid out by Cnooc.

Still, with the 3% drop in the Canadian dollar over the past 10 days, Mr. Spitz said, repatriation will likely be an attractive option for those shareholders. The U.S. dollar simply goes further in Canada than it did just a couple of weeks ago.

Mr. Spitz said traders are bracing for "chunky flow."

In 2007, the U.S. dollar was already sloping downward against the Canadian dollar, when it plunged to its historic low. Now, the slope is upward, and that might mean a jump in loonie demand simply prevents the greenback from rising further.

"It's probably not going to reverse the rally for a sustained period of time," said Ms. Sutton. "But still it is a risk, and sometimes it's hard to step in front of those flows when we have the market moving quite strongly."

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