Canada’s Dollar Falls for a Second Week as Oil Drops Below $50

By Chris Fournier

Nov. 22 (Bloomberg) -- Canada’s currency declined for a second straight week as the global economic slowdown pushed oil below $50 per barrel and stocks tumbled.

The Canadian currency depreciated 2.3 percent since Nov. 14 and traded near a four-year low as the Bank of Canada Commodity Price Index slumped to the lowest in more than two years. Raw materials account for about a third of Canada’s export revenue.

“The commodity-based currencies are really under a lot of pressure,” said Richard Briggs, a Montreal-based vice president at MF Global Canada & Co., a unit of MF Global Ltd., the world’s largest broker of exchange-traded futures and options. “The pressure on the Canadian dollar will continue.”

The Canadian dollar traded at C$1.2668 per U.S. dollar in Toronto yesterday, from C$1.2372 a week ago. One Canadian dollar buys 78.94 U.S. cents.

Canada’s currency depreciated to as low as C$1.2984 yesterday. On Oct. 28 it reached C$1.3017, the lowest since September 2004.

“We remain bearish on the Canadian dollar,” Sophia Drossos, an analyst at Morgan Stanley in New York, wrote in a note to clients. “The combination of weaker global growth and lower commodity prices suggests the Canadian dollar may be due for a catch-up to some of the weakness seen in other commodity- linked economies.”

The Standard & Poor’s 500 Index declined 8.4 percent this week. The S&P/TSX Composite Index, Canada’s stock gauge, fell 9.9 percent in the period.

Briggs predicts the loonie will decline further by year-end as commodity prices crumble and investors sell riskier assets.

Monthly Decline

Canada’s dollar is headed for its sixth straight monthly drop, the longest losing streak in 15 years. Crude oil, which accounts for a tenth of Canada’s export revenue, has dropped 66 percent from a record $147.27 a barrel on July 11. It traded at $49.93 yesterday.

Consumer prices increased 2.6 percent from October 2007 after a 3.4 percent annual increase through September, Statistics Canada reported yesterday in Ottawa. Annual inflation was slower than the 3.1 percent median forecast of 20 analysts surveyed by Bloomberg News.

‘Inflation Melt’

The report “showed that Canada is also seeing inflation melt in real time,” Doug Porter, a senior economist for BMO Capital Markets in Toronto, wrote in a note to clients. “Inflation is poised to plunge again in November. This report gives the all-clear signal to the Bank of Canada to continue cutting rates.”

The central bank cut borrowing costs six times in the past 12 months, lowering its overnight rate to 2.25 percent from 4.5 percent to spur the economy.

Policy makers will cut interest rates by another 50 basis points when they meet on Dec. 9, according to Morgan Stanley’s Drossos. “As downside risks are magnified, we expect the Bank of Canada to take out additional ‘insurance rate cuts,’” she wrote. Drossos forecasts the Canadian dollar will weaken to C$1.40 in the first quarter of 2009.

The yield on the two-year government bond fell nine basis points in the week, or 0.09 percentage point, to 1.81 percent. The price of the 2.75 percent security due in December 2010 rose 17 cents to C$101.86.

The 10-year note’s yield dropped 15 basis points in the period to 3.48 percent. The price of the 4.25 percent security maturing in June 2018 advanced C$1.28 to C$106.22.

The 10-year bond yielded 167 basis points more than the two- year security. The so-called yield curve reached 184 basis points on Nov. 6, the steepest since May 2004.

Retail sales data will be released on Nov. 25.

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