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Canadian Currency Heads for Weekly Decline on Growth Concern

By Ye Xie

May 15 (Bloomberg) -- Canada’s currency headed for the biggest weekly decline since January, after gaining for six straight weeks, as concern that global economic growth won’t resume soon damped demand for commodity-linked currencies.

The Canadian dollar depreciated as stocks fell, crude oil tumbled and reports showed Europe’s economy contracted at the fastest pace in at least 13 years in the first quarter. It pared losses earlier after reports showed U.S. industrial production and New York area manufacturing declined less than economists expected, lowering demand for the greenback as a haven.

“The Canadian dollar’s move reflects the market’s adjustment of risk sentiment,” said Shane Enright, currency strategist at CIBC World Markets Inc. in Toronto. “We had a good run, and we are in a consolidation period. We need to see the bleeding is stopped.”

Canada’s currency, known as the loonie, weakened 0.9 percent to C$1.1794 per U.S. dollar at 1:50 p.m. in Toronto, from C$1.1691 yesterday. One Canadian dollar buys 84.79 U.S. cents. The currency has declined 2.5 percent this week, the biggest drop since the five days ended Jan. 16.

North American stocks dropped, pushing the Standard & Poor’s 500 Index down 1.1 percent. The correlation coefficient between the stock gauge and the Canadian dollar was 0.74 this year, based on the percentage of change between the two. A reading of 1 would indicate they moved in lock step.

Crude Plunges

Crude oil for June delivery dropped 3.2 percent to $56.76 a barrel. Commodities including oil account for half of Canada’s exports.

The loonie earlier pared losses after the Federal Reserve said U.S. industrial production fell 0.5 percent last month, the slowest pace in six months.

The U.S. currency pared gains versus the euro and the British pound after the New York Federal Reserve Bank’s general economic index rose to minus 4.6, better than forecast, from minus 14.7 the prior month.

The U.S. dollar is “leaning heavily on” a support level at C$1.1670, while the resistance level in the “upper C$1.1700 zone” caps its appreciation, Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., wrote in a research note today. A support level is where orders to buy concentrate, while selling orders cluster at a resistance level.

Factory Shipments

Factory sales in Canada declined 2.7 percent in March from the prior month to C$41.4 billion ($35.2 billion), Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg News forecast the shipments would gain 1 percent, the median of 20 estimates. Sales have plunged by about a quarter since peaking in July, the agency said.

“This paints a gloomy picture for the economy,” said Matthew Strauss, a senior currency strategist at RBC Capital Markets Inc. in Toronto, a unit of Canada’s biggest bank by assets. “Fortunately, the market has priced that in.”

Canadian government bonds lost investors 1 percent so far this year, according to Merrill Lynch & Co. indexes. The yield on the 10-year government bond rose one basis point today, or 0.01 percentage point, to 3.10 percent. The price of the 3.75 percent security due in June 2019 fell 13 cents to C$105.54.

The loonie will weaken to C$1.19 against the U.S. dollar by year-end, according to the median forecast in a Bloomberg survey of 43 economists.

Gross domestic product in the 16-member euro region dropped 2.5 percent from the fourth quarter, when it fell 1.6 percent, the European Union’s statistics office in Luxembourg said. That’s the biggest drop since euro-area GDP data were first compiled in 1995 and exceeded the 2 percent decline economists expected in a Bloomberg News survey.

To contact the reporter on this story: Ye Xie in New York at yxie6@bloomberg.net

Last Updated: May 15, 2009 13:53 EDT