Canada's Dollar Falls on Securities, Wholesale Sales Reports

By Chris Fournier

Oct. 20 (Bloomberg) -- Canada's currency weakened for a second day after reports showed wholesale sales in August fell for the first time since February and foreigners decreased their holdings of Canadian securities for a second month.

The Canadian dollar, known as the loonie because of the aquatic bird on the one-dollar coin, has declined 10.6 percent this month as commodities fell. Traders also sold the currency on speculation the country's central bank will cut borrowing costs tomorrow. The U.S. is Canada's largest trading partner.

``Wholesale sales numbers show there's just not as much economic activity from overseas and the U.S., and people are pulling out of Canadian assets,'' said Tyson Wright, senior currency trader at Custom House in Victoria, British Columbia. ``The Canadian economy is on the slow. That will continue to put pressure on the loonie, especially if the Bank of Canada, as is widely expected, cuts rates tomorrow. We'll see the Canadian dollar struggle to appreciate in the near term.''

Canada's dollar depreciated as much as 0.9 percent to C$1.1921 per U.S. dollar, from C$1.1820 on Oct. 17. It last traded at C$1.1910 at 10:16 a.m. in Toronto. One Canadian dollar buys 83.96 U.S. cents.

Sales fell 1.5 percent to C$45.7 billion ($38.6 billion), Statistics Canada said in Ottawa. Economists surveyed by Bloomberg said sales would drop 0.9 percent, the median of nine estimates, after a 2.7 percent increase in July.

International investors sold a net C$730 million of securities in August.

Three Weeks

Canada's currency has dropped for three straight weeks on speculation that a global recession will crimp demand for commodities such as crude oil, which accounts for about 10 percent of the country's export revenue.

Crude has declined by about half to $73.81 a barrel since reaching a record $147.27 on July 11. The Canadian dollar has weakened by 15 percent since then.

``Over the longer term we will see the demand for U.S. dollars remain in place, and commodity currencies coming under pressure,'' said Ian Stannard, a senior currency strategist in London at BNP Paribas SA, France's biggest bank. ``We are still very bullish on the U.S. dollar.''

The Bank of Canada will cut borrowing costs tomorrow, according to the median forecast of 22 economists surveyed by Bloomberg News. Eleven forecast a half-percentage point reduction to 2 percent, seven predict a quarter-point reduction and four believe policy makers will hold rates unchanged.

`Risks Ahead'

``What's moving the Canadian dollar is short positioning ahead of tomorrow's Bank of Canada decision,'' said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. ``Correlated energy and commodity markets are Canadian-dollar friendly, but are likely to be outweighed by the event and data risks ahead.''

The central bank lowered its key rate to 2.5 percent from 3 percent on Oct. 8 as part of a coordinated effort to ease the economic effects of the financial crisis.

The 10-year note's yield climbed 4 basis points, or 0.04 percentage point, to 3.77 percent. The price of the 4.25 percent security maturing in June 2018 dropped 36 cents to C$103.85.

The yield on the two-year government bond declined 1 basis point to 2.26 percent. The price of the 2.75 percent security due in December 2010 rose 1 cent to C$101.01.

The 10-year bond yielded 151 basis points more than the two- year security, from 158 basis points on Oct. 10, when it was the steepest since September 2004.

`Diminishing Inflation Fears'

The flattening of the yield curve ``does reflect a sense of optimism that perhaps is pervading, or at least a lack of devastating outcomes,'' said Eric Lascelles, a strategist at TD Securities in Toronto. ``We also have the reemergence of the liability-driven investment flows that tend to affect Canada's long end, and that means that pension and insurance companies are really putting money into the long end. We also have diminishing inflation fears that are keeping some pretty good appetite on Canada's long end.''

Canadian government bonds have returned 4.1 percent in 2008, according to Merrill Lynch & Co. index statistics. U.S. Treasuries have returned 4.4 percent this year.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net