Canadian Dollar Falls for a Fourth Week; Government Bonds Gain

By Chris Fournier

Oct. 25 (Bloomberg) -- Canada's dollar fell for a fourth week, its longest losing streak in almost a year, and two-year bond yields touched the lowest in almost two decades on speculation the economic slump will deepen and oil will decline.

Canada's currency, dubbed the loonie for the aquatic bird on the one-dollar coin, is poised for its worst month since at least 1950 after touching the lowest since September 2004 yesterday. It has declined 17 percent since September.

``We're right off the charts in terms of how big this decline is,'' said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. ``We continue to see tremendous volatility in all financial markets and that's most definitely affecting the currency markets as well.''

The Canadian dollar depreciated 7.5 percent to C$1.2775 per U.S. dollar in Toronto, from C$1.1820 on Oct. 17. Yesterday it touched C$1.2842, the lowest since Sept. 23, 2004. One Canadian dollar buys 78.28 U.S. cents. It's slide is the longest since it fell for six straight weeks in the period ended Dec. 14.

The loonie's drop this month is the most in at least 58 years, according to Bloomberg and Bank of Canada data. The Canadian dollar was fixed to the U.S. currency from the founding of the country's central bank in 1939 until after World War II, according to the bank's Web site. It was allowed to float from 1950 until 1962, and then again from June 1970.

`Canadian Dollar's Prospects'

The currency fell 6.2 percent in November 1976, after Quebec, the country's second-most populous province, elected the separatist Parti Quebecois, ``prompting markets to make a major reassessment of the Canadian dollar's prospects,'' wrote James Powell, author of a book on the history of the currency.

The drop this month is also larger than any annual decline since 1950, exceeding the previous full-year drop of 9.1 percent in 1992.

Crude oil, which accounted for 10 percent of Canada's export revenue in 2007, dropped 11 percent this week to $64.22 a barrel, a 16-month low. Crude reached a record $147.27 on July 11. Since then, the loonie has lost 21 percent.

Alberta's government estimates its oil sands, about 750 kilometers (466 miles) northeast of Calgary, hold the largest oil reserves in the world outside Saudi Arabia.

`Very Brave Person'

``Commodity prices are rumbling away in the background and that's definitely one of the factors weighing on the Canadian dollar,'' Porter said.

Porter predicts the currency will strengthen to C$1.17 or C$1.18 in 12 months, although ``you have to be a very brave person to say when it's going to bottom,'' he said.

The MSCI World Index lost 8.3 percent this week and is down by almost half this year. The Bank of Canada Commodity Price Index, which comprises 23 raw materials produced in Canada such as crude, natural gas and aluminum, fell for a fourth week.

``Canada continues to be buffeted by global financial- market dislocations, hampering recovery prospects,'' Citigroup Global Markets Inc.'s Dana Peterson wrote in a note. ``Canadian financial conditions have soured, exports are impaired by flagging U.S. domestic demand, and commodity price declines and volatility are diminishing terms of trade.''

Teck Cominco Ltd., the Vancouver miner that generated half its third-quarter operating profit from coal and about a third from copper, said on Oct. 22 that its earnings stand to increase by C$50 million ($39.3 million) for every 1 percent the loonie weakens against the U.S. dollar. Sales of the company's products are priced in U.S. dollars and become worth more when converted to Canadian dollars.

`Still Go Higher'

``Can the U.S. dollar still go higher against the Canadian dollar? Why not?'' CIBC World Markets' Adam Fazio in New York and Shane Enright in Toronto wrote in a note to clients. Citing ``panic-induced markets,'' the strategists said the loonie could weaken to C$1.30 this month.

The yield on the Government of Canada two-year note fell below 2 percent for the first time since at least 1989, when Bloomberg records begin. The Bank of Canada cut borrowing costs by 25 basis points, or 0.25 percentage point, to 2.25 percent on Oct. 21, after lowering rates by 50 basis points on Oct. 8 in conjunction with other central banks around the world.

The two-year note's yield declined 17 basis points this week to 2.10 percent. Yesterday it touched 1.991 percent. The price of the 2.75 percent security due in December 2010 rose 32 cents to C$101.32.

The 10-year note's yield fell 9 basis points in the period to 3.64 percent. The price of the 4.25 percent security maturing in June 2018 added 69 cents to C$104.89.

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