Canada's Dollar Poised for Biggest Weekly Decline Since 1971

By Chris Fournier

Oct. 10 (Bloomberg) -- Canada's dollar headed for the biggest weekly slump since at least 1971 as the deepening credit crisis drove investors to take refuge in the U.S. dollar.

The Canadian currency has declined 8.4 percent this week against its U.S. counterpart, touching the lowest since February 2007 today, as prices for commodities including crude oil plummeted and global stock markets plunged.

``The Canadian dollar has become the whipping boy,'' said Jonathan Gencher, director of foreign-exchange sales at Bank of Montreal in Toronto. ``This is still part of the bigger picture of demand for U.S. dollars.''

The Canadian dollar dropped as much as 2.9 percent today to C$1.1834 per U.S. dollar, from C$1.1501 yesterday, the weakest since Feb. 9, 2007. The currency fell for a seventh day, its longest losing streak since the period ended Aug. 11. It last traded at C$1.1763 at 10:22 a.m. in Toronto. One Canadian dollar buys 85 U.S. cents.

Gencher ``wouldn't be surprised'' to see the Canadian currency depreciate to C$1.20 by the end of the year.

Canada's currency will slip to C$1.13 against the U.S. dollar by the end of 2009, according to the median forecast in a Bloomberg News survey of economists.

Crude oil for November delivery fell as much as $7.98, or 9.2 percent, today to $78.61 a barrel on the New York Mercantile Exchange. It closed at $93.88 a week ago and reached a record $147.27 on July 11.

The Canadian currency briefly pared its loss today after a government report showed the nation recorded its biggest one- month employment gain in at least 30 years during September.

`Ignoring the Data'

``People are ignoring the underlying data and dwelling on the uncertainty for the global economy,'' said Millan Mulraine, an economics strategist at TD Securities in Toronto. ``We should expect that to continue.''

Canada added 106,900 jobs last month after a gain of 15,200 positions in August, Statistics Canada said today in Ottawa. The median forecast of 20 economists surveyed by Bloomberg News was for an increase of 10,000 in September. Canada's unemployment rate held at 6.1 percent.

``Data isn't driving the currency these days,'' said Shane Enright, currency strategist at CIBC World Markets Inc. in Toronto. ``Oil is lower because credit spreads continue to widen and equity markets continue to plunge. Oil and the Canadian dollar moves are the secondary effects of these factors.''

The Bank of Canada joined the Federal Reserve, the European Central Bank and other global counterparts on Oct. 8 in reducing interest rates to ease the financial crisis. The Canadian target lending rate was cut to 2.5 percent from 3 percent. The Bank of Canada next meets Oct. 21.

Another Weekly Decline

Canada's dollar has weakened 12 percent since Sept. 26 as turmoil in global financial markets prompted investors to seek the relative safety of U.S. government debt. The Canadian currency, dubbed the loonie because of the aquatic bird on the one-dollar coin, slumped 4.5 percent last week.

``We are still heading into a very challenging macro- economic environment for the Canadian dollar,'' said David Watt, a senior currency strategist at RBC Capital Markets in Toronto, a unit of Canada's biggest bank by assets. ``The outlook has not changed. The Canadian dollar can't escape the macro background, but it can avoid the worst of the fear and panic-driven mania.''

Other commodity-based currencies, including those in Brazil, Australia and New Zealand, have declined versus the Canadian dollar so far this week.

The yield on the two-year government bond slipped 28 basis points, or 0.28 percentage point, to 2.25 percent this week. The price of the 2.75 percent security due in December 2010 climbed 56 cents during the period to C$101.04.

The 10-year note's yield increased 21 basis points to 3.80 percent during the week. The price of the 4.25 percent security maturing in June 2018 fell C$1.77 to C$103.61.

The 10-year bond yielded 155 basis points more than the two- year security, up from 106 basis points a week ago. The so-called yield curve is the steepest since September 2004.

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