Canada’s Dollar Falls as Economy Contracts, Investors Shun Risk

By Chris Fournier

Jan. 31 (Bloomberg) -- Canada’s currency fell in January as a report showed the economy shrank in November and the global recession led investors to take refuge in the U.S. dollar.

The Canadian dollar, known as the loonie, depreciated 0.8 percent this month as the U.S. economy contracted the most in the fourth quarter since 1982. The U.S. is Canada’s largest export market.

“There’s not a lot of good things out there right now for the Canadian dollar,” said Andrew Busch, a currency strategist at BMO Capital Markets in Chicago. “We’ve been getting earnings and economic data that continue to show a dire situation. It’s hard to gain any traction.”

The Canadian currency slid to C$1.2296 per U.S. dollar yesterday in Toronto, from C$1.2188 on Dec. 31. One Canadian dollar buys 81.40 U.S. cents.

The loonie will weaken to C$1.26 against the U.S. dollar by the end of March before rebounding by year-end to C$1.20, according to the median forecast of 41 economists surveyed by Bloomberg News.

Canada’s economy, the world’s eighth-largest, contracted 0.7 percent in November, Statistics Canada said yesterday in Ottawa. The drop, which was more than forecast, was the biggest since August 2003, when northeastern North America was hit by a power blackout.

“GDP numbers for Canada were horrible,” said David Watt, a senior currency strategist in Toronto at RBC Capital Markets. “Any sort of rebound in confidence in the Canadian dollar has proved elusive.”

C$40 billion Stimulus

Petro-Canada, Canada’s third-biggest oil and gas producer posted a C$691 million fourth-quarter loss on Jan. 29. Procter & Gamble Co., the world’s largest consumer-products company, posted quarterly sales yesterday that trailed estimates, and the company reduced its annual forecast.

A collapse in demand for commodities and a recession in the U.S. weakened the loonie by 18 percent last year, the currency’s worst-ever performance. It fell in seven of the last eight months. Raw materials such as crude oil generate half the country’s exports.

Canada’s dollar rose to C$1.2026 on Jan. 28, the strongest in two weeks, after the opposition Liberal Party spared the ruling Conservative Party from defeat by signaling accord with its proposed C$40 billion ($32.6 billion) package of economic revival measures.

The greenback strengthened this week against 10 of its 16 most actively traded counterparts as investors sought relative safety from global economic turmoil in the world’s reserve currency. The exceptions were the pound, South Korea’s won, the loonie, Brazil’s real, Norway’s krone and South Africa’s rand.

The yield on the two-year government bond rose 18 basis points in the week, or 0.18 percentage point, to 1.42 percent. The price of the 2.75 percent security due in December 2010 fell 35 cents to C$102.40.

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