Canadian Currency Approaches a Three-Week Low on Economic Slowdown Concern

Canada’s dollar dropped to the lowest level in almost three weeks as commodities and stocks tumbled a day after the Federal Reserve said the recovery in the U.S., the nation’s largest trading partner, will be slower.

The currency weakened against most of its major counterparts as a report showed Canada’s trade deficit unexpectedly widened in June on falling sales of gold, energy and automobiles. The yield on the nation’s 10-year government bond dropped to the lowest level in more than a year.

“The market is still digesting the Fed announcement yesterday,” Blake Jespersen, director of foreign exchange at Bank of Montreal, said by phone from Toronto. “Today things look a little shaky again with commodities lower.”

The Canadian currency, nicknamed the loonie, depreciated 1.4 percent to C$1.0464 per U.S. dollar at 4:40 p.m. in New York, from C$1.0314 yesterday. It touched C$1.0475, the weakest level since July 22. One Canadian dollar buys 95.57 U.S. cents.

Crude oil for September delivery dropped 3.4 percent to $77.55 a barrel on the New York Mercantile Exchange. Crude is Canada’s largest export. The Standard & Poor’s 500 Index tumbled 2.8 percent. The loonie tends to rise and fall with stocks and commodities as a proxy for risk appetite.

The 10-year government bond’s yield fell 8 basis points, or 0.08 percentage point, to 2.97 percent and touched 2.96 percent, the lowest level since April 2009. The price of the 3.5 percent security due in June 2020 rose 70 cents to C$104.54. The current two-year note yield slid 11 basis points to 1.34 percent.

Government Auction

Canada sold C$3 billion ($2.9 billion) of two-year notes, drawing an average yield of 1.524 percent. The government received bids of C$7.6 billion for the 1.5 percent securities maturing in December 2012, according to a statement today on the Bank of Canada’s Web site.

The nation’s government bonds have returned investors 5.6 percent this year, according to a Bank of America Merrill Lynch index.

The Fed said in its policy statement yesterday that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

It directed the New York Fed’s trading desk to reinvest what economists estimate will be $15 billion to $20 billion a month in maturing agency and mortgage-backed securities back into Treasuries.

The U.S. central bank left the overnight interbank lending rate target in a range of zero to 0.25 percent, where it has been since December 2008.

‘Increased Uncertainty’

“There’s increased uncertainty regarding the economic outlook,” said John Clinkard, chief economist for Canada at Deutsche Bank AG’s Deutsche Bank Securities in Toronto. “We’ve seen numbers coming out of the U.S. and the Fed’s comments, and this has all put a significant cloud on Canada’s second-half performance.”

Canada’s trade deficit unexpectedly widened to C$1.13 billion in June from a revised C$695 million gap in May, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg predicted the deficit would narrow to C$300 million from an initially reported May trade shortfall of C$503 million, according to the median of 14 estimates.

Trade will shave 1.6 percentage points from Canada’s economic growth rate this year, the Bank of Canada said last month. While Governor Mark Carney has raised interest rates twice since June 1, to 0.75 percent, he has said further action would be “weighed carefully against domestic and global economic developments.”

Lackluster economic data in the U.S. and Canada reduce the likelihood the central bank will increase rates at its next meeting in September, said Clinkard, who forecasts a 60 percent chance Canadian policy makers will raise rates.

To contact the reporter on this story: Alex Kowalski in New York at akowalski13@bloomberg.net

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