Canadian Currency Drops to Three-Week Low on ‘Risk-Off Picture’

By Chris Fournier

Dec. 17 (Bloomberg) -- Canada’s dollar declined to a three- week low versus its U.S. counterpart as a drop in global stocks reduced demand for commodity-linked currencies.

The Canadian dollar weakened even after a government report showed consumer prices rose at a 1 percent annual pace in November, the fastest in eight months, as a slump in gasoline costs linked to the global recession ended.

“It’s still the global-equities, risk-off picture that’s leading the way today,” said JP Blais, vice president of foreign exchange in Toronto at Bank of Montreal. “That’s making the U.S. dollar stronger across the board.”

The Canadian currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, depreciated 1 percent to C$1.0714 per U.S. dollar at 4:44 p.m. in Toronto, from C$1.0613 yesterday. It touched C$1.0747, the weakest since Nov. 27. One Canadian dollar buys 93.34 U.S. cents.

The loonie pared losses as crude oil, Canada’s biggest export, reversed a retreat. Crude for January delivery was little changed at $72.70 a barrel after falling as much as 2 percent as the U.S. currency strengthened, limiting the appeal of commodities as an alternative investment.

The U.S. dollar rose against all 16 of its most-traded counterparts tracked by Bloomberg. It touched a three-month high of $1.4305 per euro as stock declines stoked demand for the greenback as a refuge.

The Canadian currency still outperformed 11 of the 16 so- called majors, gaining the most against Norway’s krone. It reached C$1.5324 versus the euro, the strongest since Oct. 15.

‘Uptick in Inflation’

Canada’s retail gasoline prices were 14 percent higher in November than a year earlier, compared with October’s decline of 13 percent, Statistics Canada said today in Ottawa. Housing was the only one of eight major inflation components to drop last month. Economists surveyed by Bloomberg News had expected overall annual inflation to increase 0.8 percent, based on the median of 22 forecasts.

“Any uptick in inflation like we’re seeing today would bring the first interest-rate move by Canada a little bit closer,” said Blais at Bank of Montreal, Canada’s fourth- largest lender. “That would definitely be a positive for the Canadian dollar. If we were to move it would make Canada more attractive on a fixed-income basis.”

Bank of Canada Governor Mark Carney repeated yesterday he plans to keep his benchmark interest rate at a record low 0.25 percent through June to help stimulate demand and bring inflation back to the bank’s 2 percent target in the second half of 2011. Lower gasoline prices drove the inflation rate below zero for four straight months through September, the longest period since 1953.

Bond Sale

Canada sold C$3 billion ($2.8 billion) today of 1.5 percent notes maturing in March 2012, drawing an average yield of 1.473 percent, according to a notice on the Bank of Canada’s Web site. The auction attracted total bids of C$8.19 billion, for a bid- to-cover ratio, a gauge of demand, of 2.73. It was 2.41 at the last auction of the securities, on Nov. 12

The yield on the government’s benchmark two-year bond fell four basis points, or 0.04 percentage point, to 1.28 percent. The price of the 1.25 percent security due in December 2011 rose 7 cents to C$99.94. The 10-year note’s yield decreased four basis points to 3.36 percent.

The MSCI World Index, a gauge of equities in 23 developed nations, tumbled as much as 1.8 percent, the most on an intraday basis in three weeks. The Standard & Poor’s 500 Index dropped 1.2 percent. Canada’s currency tends to rise and fall with stocks and commodity prices.

The loonie will strengthen to C$1.02 to the greenback by the end of March, according to the median forecast in a Bloomberg survey of 35 economists and analysts.

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

Last Updated: December 17, 2009 16:48 EST