Canadian Dollar Weakens as Stocks Decline on Aversion to Risk

The Canadian dollar declined versus its U.S. counterpart amid weak North American economic data and falling stocks as concern Spain’s fiscal woes may intensify Europe’s debt crisis fueled investment in low-risk assets.

Canada’s currency extended a second weekly decrease against its U.S. peer after an economic-growth report suggested the nation’s homebuilding may be slowing and U.S. business activity unexpectedly contracted for the first time in three years. Canadian government bonds rose, with the yield on the benchmark 10-year note declining to the lowest level in almost two months. The so-called loonie pared monthly and quarterly gains as a stress test showed Spain’s banks have a combined capital shortfall of 59.3 billion euros ($76.3 billion).

“Spain is a top concern and causing jitters,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal (BMO), said in a phone interview. “Equity markets are also shaky today, which is hurting the risk tone. It’s why you’re seeing profit-taking on riskier currencies.”

The loonie, as the Canadian currency is known for the image of the aquatic bird on the C$1 coin, fell 0.3 percent to 98.37 cents per U.S. dollar at 5 p.m. in Toronto after earlier gaining 0.2 percent. One Canadian dollar buys $1.0166.

Yields on 10-year government bonds fell three basis points, or 0.03 percentage point, to 1.73 percent after touching 1.69 percent, the lowest since Aug. 3. The 2.75 security maturing in June 2022 added 27 cents to 109.10.

The Standard & Poor’s 500 Index slid 0.5 percent and lost 1.3 percent this week. Futures in crude-oil, Canada’s largest export, gained 0.3 percent to $92.10 per barrel in New York after falling as much as 0.5 percent.

Longs Gain

Futures traders decreased their bets that the Canadian dollar will gain against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the Canadian dollar compared with those on a drop -- so-called net longs -- was 105,346 on Sept. 25, compared with net longs of 111,881 a week earlier. Futures are agreements to buy or sell assets at a set price and date. The figures reflect holdings in currency-futures contracts at the Chicago Mercantile Exchange as of Tuesday.

Canadian output rose 0.2 percent to an annualized C$1.29 trillion ($1.31 trillion), Statistics Canada said today in Ottawa, faster than the 0.1 percent gain forecast in a Bloomberg News economist survey with 23 responses. The agency today also reduced its June growth estimate to 0.1 percent from 0.2 percent. Home construction declined 0.1 percent in July and the output of real estate agents and brokers fell 1.5 percent.

‘Risk-Off Mood’

“You’d expect people to think about interest rates, but I think the market is really still ignoring domestic data,” Greg Moore, currency strategist at Toronto-Dominion Bank (TD), said in a phone interview. “There’s a risk-off mood moving the dollar lower.”

Bank of Canada Governor Mark Carney on Sept. 5 held his key lending rate at 1 percent, where it’s been since September 2010, the longest unchanged period since the 1950s. Carney reiterated that an increase “may become appropriate” as domestic spending props up an economic recovery restrained by weak global demand for exports.

Other Canadian reports this month have shown little pressure for Carney to raise interest rates soon. Consumer prices advanced 1.2 percent in August from a year ago, below the central bank’s 2 percent target, and realtor reports have signaled home price increases are ebbing in major cities where Finance Minister Jim Flaherty had said there were signs of overbuilding.

Spain, U.S.

Among Spain’s banks, the Bankia group, a nationalized lender, had a 24.7 billion-euro capital deficit in the tests conducted by management consultants Oliver Wyman that also showed Banco Popular Espanol SA had a 3.22 billion-euro shortfall. The stress tests of 14 lenders showed no capital deficit for seven banks, including Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and Banco Sabadell SA.

Benchmark U.S. stock indexes extended declines as the Institute for Supply Management-Chicago Inc. said its business barometer fell to 49.7 this month from 53 in August. A reading of 50 is the dividing line between growth and contraction. U.S. household purchases rose 0.5 percent, matching the median estimate of economists, while the Thomson Reuters/University of Michigan final sentiment index (SPX) rose to 78.3 this month from 74.3 in August, trailing the median economist estimate of 79.

Canada’s dollar has strengthened 1.6 percent this year against nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Currency Indexes. The greenback has dropped 2.6 percent, with the yen tumbling 4 percent to lead decliners. The New Zealand dollar’s 4.9 percent rise leads gainers.

To contact the reporter on this story: Katia Dmitrieva in New York at edmitrieva1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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