Canada's Dollar Declines on Growth Outlook, Falling Commodities

By Chris Fournier

Nov. 15 (Bloomberg) -- Canada's currency depreciated as commodity prices dropped in the face of renewed pessimism over global economic growth.

The Canadian dollar weakened 3.9 percent this week as overall new orders for the country's factory goods fell, U.S. retail sales dropped the most on record and Europe's economy sank into recession. Crude oil reached the lowest in almost two years.

``It really boils down to global growth and the commodity story,'' said Samarjit Shankar, director of strategy for the global markets group in Boston at Bank of New York Mellon, the world's largest custodial bank with over $23 trillion in assets under administration. ``There's a lot of negative momentum right now for energy prices. If things remain the way they are, the Canadian dollar is likely to drift down.''

Canada's dollar dropped to C$1.2372 per U.S. dollar, from C$1.1893 on Nov. 7. One Canadian dollar buys 80.83 U.S. cents. The currency has lost 19 percent this year.

Crude oil touched $54.67 a barrel on Nov. 13, the lowest since Jan. 30, 2007. Natural gas for December delivery fell 6.3 percent this week. The two raw materials generated 17 percent of Canada's 2007 export revenue.

The Bank of Canada's index of 23 commodity prices has slumped more than 40 percent since reaching a record in July. Canada is the biggest supplier of crude to the U.S., according to U.S. government data.

`Growth Is Fading'

``Every indicator is pushing in the direction of further Canadian dollar weakness,'' said Sebastien Galy, a currency strategist at BNP Paribas Securities SA in New York. ``Global growth is fading. Commodities are fading.''

Galy predicts the loonie, as Canada's dollar is known for the aquatic bird on the one-dollar coin, will ``easily'' weaken to C$1.30 by year-end. Shankar ``wouldn't rule that out.''

``Downward pressures on the loonie are still alive and kicking,'' Yanick Desnoyers, senior economist with National Bank Financial in Montreal, wrote in a report. He predicts the Canadian dollar will depreciate to C$1.28 by the end of the first quarter on ``further deterioration in the world economy.''

Europe fell into its first recession in 15 years as gross domestic product in the 15 euro nations shrank for two straight quarters. The Organization for Economic Cooperation and Development cut its 2009 global-growth forecast for the second time this year.

Overall new orders for factory goods fell 3.6 percent in September, the second straight decline, Statistics Canada said yesterday. Sales at U.S. retailers fell 2.8 percent in October, the Commerce Department reported.

Canadian home sales fell 14 percent in October from the month before.

`Buying U.S. Dollars'

``We continue to advocate buying U.S. dollars on dips, targeting a return to the C$1.25 to C$1.30 at a minimum,'' according to CIBC World Markets analysts Shane Enright in Toronto and Adam Fazio in New York. ``The immediate technical call is for further U.S. dollar strength.''

The yield on the two-year government bond fell 1 basis point, or 0.01 percentage point, to 1.90 percent this week. The price of the 2.75 percent security due in December 2010 was unchanged at C$101.69.

The 10-year note's yield dropped 9 basis points in the period to 3.63 percent. The price of the 4.25 percent security maturing in June 2018 rose 70 cents to C$104.94.

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