Canada’s Currency Weakens as Equities, Crude Oil Post Losses

By Matt Townsend

Oct. 28 (Bloomberg) -- Canada’s currency depreciated against its U.S. counterpart to the lowest level in more than three weeks as declines in crude oil, the nation’s largest export, and stocks damped demand for higher-yielding assets.

The Canadian dollar, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, fell against 11 of the 16 most-traded currencies tracked by Bloomberg, including the yen, euro and pound. The U.S. dollar rose against 14 of them. Bank of Canada Governor Mark Carney reiterated today during testimony in Parliament that a strong loonie threatens the nation’s economy.

“Risk aversion, Carney, equities and the stronger dollar should keep the Canadian dollar under pressure short term,” said Dean Popplewell, a currency analyst in Toronto at Oanda Corp., an online currency-trading firm. “Fundamentals still support the Canadian dollar, but there are better levels to buy it.”

The Canadian dollar depreciated 1.5 percent to C$1.0811 per U.S. dollar at 5 p.m. in Toronto, from C$1.0647 yesterday. It touched 1.0814, the weakest level since Oct. 5. The currency rallied against the greenback 13 percent this year and fell 1.1 percent this month. One Canadian dollar buys 92.50 U.S. cents.

The loonie extended its decline against the dollar as sales of new U.S. homes unexpectedly fell 3.6 percent in September, raising concern that an economic recovery in Canada’s largest trading partner may be losing momentum and increasing demand for the safety of the U.S. dollar.

Currency Strength

Canadian government bonds rose today, pushing the yield on the two-year note down five basis points, or 0.05 percentage point, to 1.43 percent. The price of the 1.25 percent security due in December 2011 increased 10 cents to C$99.63. The 10-year note yield decreased four basis points.

The Bank of Canada amplified a warning that the loonie’s appreciation threatens the nation’s economic recovery in a statement on Oct. 20 after it left the benchmark interest rate at a record low of 0.25 percent and said it would remain there until mid-2010.

Carney repeated the comment two days later and said intervention to deal with the currency’s strength is “always an option.” Central banks intervene by buying or selling currencies to influence exchange rates.

The central banker reiterated the strength warning yesterday during his first day of testimony to lawmakers and followed with more comments today. He also said there are other “options” to slow the currency’s appreciation, including quantitative easing, when a central bank buys securities to inject new cash into an economy. The loonie has weakened 4.9 percent since Oct. 19.

Resistance Level

The U.S. dollar broke through a so-called resistance level, an area on a chart where sell orders may be clustered, against the Canadian dollar when it climbed above C$1.07, and it now may move to the low C$1.09 area, analysts led by Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., wrote in a note today.

The TD strategists added that such a weakening of the loonie “looks excessive” and may be pared as the month ends.

The Standard & Poor’s 500 Index fell for a fourth day, tumbling 2 percent. It retreated 0.7 percent last week. The MSCI World Index, a measure of stocks in 23 developed markets, was down for the seventh straight day, also dropping 2 percent.

Crude oil for December delivery slid as much as 3 percent to $77.15 a barrel on the New York Mercantile Exchange, the lowest level since Oct. 16. The Reuters/Jefferies CRB Index of 19 raw materials fell 2 percent. Raw materials account for more than half of Canada’s export revenue.

The loonie will strengthen to C$1.05 per U.S. dollar by year-end, according to the median forecast of 37 economists and analysts in a Bloomberg survey.

To contact the reporter on this story: Matt Townsend in New York at mtownsend9@bloomberg.net