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Loonie Touches Seven-Week Low as North American Outlook Fades

Canada’s dollar fell for a fourth straight day, touching the lowest level in seven weeks, as investors soured on higher-yielding assets and currencies tied to growth.

The loonie and the Mexican peso are the worst performers versus the greenback among the 16 most-traded currencies during the past five days reflecting speculation the North American economic recovery is faltering. A government report today showed retail sales rose less than economists anticipated in June after dropping in the previous two months.

“There’s nothing pointing positive for Canada at the moment,” John Curran, a senior vice president at CanadianForex Ltd., an online foreign-exchange dealer, said by phone from Toronto. “Everybody is scared of their shadows out there.”

The Canadian currency, known as the loonie for the bird’s image on the one-dollar coin, fell 0.9 percent to close at C$1.0615 per U.S. dollar in Toronto after touching C$1.0665, the lowest level since July 6. It ended at C$1.0522 yesterday. One Canadian dollar buys 94.21 U.S. cents.

Canadian retail sales rose 0.1 percent to C$35.9 billion ($33.9 billion) as sales increases in appliance and electronics stores were offset by lower receipts at gasoline stations and general merchandisers, Statistics Canada said today in Ottawa. Economists surveyed by Bloomberg anticipated a 0.4 percent rise, according to the median of 16 estimates.

Slower Growth

The report supports the Bank of Canada prediction that the economy slowed in the second quarter after growing at a 6.1 percent pace in the first quarter, the fastest in a decade.

Government bonds rose, pushing the two-year bond yield down 5 basis points, or 0.05 percentage point, to 1.2 percent. It touched 1.162 percent, the lowest since January, as the price of the 2 percent security due in September 2012 climbed 10 cents to C$101.58. U.S. Treasuries rallied, driving two-year note yields as low as 0.4542 percent, a record, after an industry report showing sales of existing homes tumbled in July bolstered concern the economy is faltering.

Canada’s two-year bonds yielded 74 basis points over the equivalent-maturity U.S. security, the least since April. The so-called yield advantage reached 115 basis points in May, the most since February 2008, on speculation the Bank of Canada would raise interest rates more aggressively than the Federal Reserve.

Bax Trades

The yield on December 2010 bankers’ acceptances, the most-active contract, fell as much as six basis points to 1.03 percent, the lowest level since the contract began trading in December 2007. The yield, which indicates about where traders believe short-term rates will settle when the contract expires, reached 2.5 percent in June.

So-called Bax contracts have settled an average of about 20 basis points above the central bank’s overnight target since 1992, Bloomberg data show. Hedge funds and money managers use the contracts to hedge against interest-rate risks and make bets. The yield falls as the price rises.

A Bank of Canada researcher found last year’s conditional policy commitment by Governor Mark Carney led to lower short-term interest rates, and was more effective than the U.S. Federal Reserve’s policy, according to a paper published today.

The MSCI World Index, a gauge of equities in developed nations, dropped 1.2 percent. Crude for October delivery fell as much as 2.3 percent to $71.45 a barrel in electronic trading on the New York Mercantile Exchange. That’s the lowest price since July 7.

Market Weight

“Weaker equities, trading near their two-week lows, along with lower commodities, crude primarily, will continue to weigh on the Canadian dollar,” Michael Leavitt, a Montreal-based institutional-derivatives broker at MF Global Canada Co., wrote in an e-mail. He said the Canadian dollar could “find some support” at C$1.0675. Support refers to the lower boundary of a trading range, where buy orders may be clustered.

The market’s reaction to the U.S. home sales report indicated speculation the Federal Reserve will take further steps to bolster the economy, which will weigh on the dollar, according to Tom Fitzpatrick, chief technical strategist at Citigroup Inc.

“We are no longer confident being long U.S. dollars versus CAD or euro,” he wrote in a note dated today. “We think the trade is wrong.” Long positions are bets that currencies will appreciate.

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