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Canadian Dollar Drops to One-Month Low as Economic Growth Slows

Canada’s dollar fell to the lowest level in a month versus the greenback after a government report showed the nation’s economy expanded at a slower pace in the third quarter than economists forecast.

The loonie, as the Canadian currency is also known, dropped against the yen as the debt crisis in Europe and speculation China will increase interest rates discouraged demand for assets related to economic growth. A gain in Canadian government bonds pushed the yield on 10-year debt to a two-week low.

“Today’s weaker-than-expected Canadian GDP numbers magnified the risk-aversion theme and have triggered some follow-through selling of the Canadian dollar,” George Davis, chief technical analyst at Royal Bank of Canada’s RBC Capital Markets unit in Toronto, wrote via e-mail.

The Canadian currency depreciated 0.8 percent to C$1.0264 per U.S. dollar at 5 p.m. in Toronto, from C$1.0181 yesterday, after touching C$1.0287, the weakest level since Oct. 28. One Canadian dollar buys 97.43 U.S. cents. The loonie is down 0.7 percent in November after touching levels stronger than parity with the greenback Nov. 5-11.

Canada’s output growth slowed from July through September more than economists predicted as a loonie approaching parity restrained exports and boosted imports, giving the Bank of Canada more reason to keep interest rates unchanged.

Gross domestic product in the world’s 10th biggest economy advanced at a 1 percent annualized third-quarter pace after revised gains of 2.3 percent and 5.6 percent in the previous two quarters. The median forecast of 26 economists in a Bloomberg News survey was for a 1.5 percent increase.

Government Bonds

Canada’s 10-year bond yield fell three basis points, or 0.03 percentage point, to 3.06 percent after touching 3.04 percent, the lowest since Nov. 15. The price of the 3.5 percent security maturing in June 2020 rose 22 cents to C$103.60.

Government bonds have lost 1 percent this month, according to a Bank of America Merrill Lynch index, compared with a 0.8 percent decline through yesterday for their U.S. counterparts.

The loonie touched the highest level since September against the euro today and is the second-best performer this month among the greenback’s major counterparts on speculation the North American economy will recover faster than Europe’s.

“The Canadian dollar will continue to outperform on the crosses in line with U.S. dollar strength,” Sacha Tihanyi, a currency strategist in Toronto at Bank of Nova Scotia’s Scotia Capital unit, wrote via e-mail. European debt concern “is driving things,” though speculation China may tighten monetary policy to cool its economy is weighing on that country’s equities, according to Tihanyi.

Loonie Versus Euro

The loonie gained 0.3 percent to C$1.3324 against the euro after rallying to C$1.3260, the strongest level since Sept. 14. The Canadian dollar depreciated 1.5 percent to 81.53 yen as investors sought refuge.

The Canadian currency tends to outperform in crosses when the greenback is “broadly stronger” and underperform on days of “broad U.S. dollar weakness,” according to Tihanyi, referring to currency pairs not involving the greenback.

“With the U.S. dollar stabilization on better data and a less pessimistic monetary outlook, the Canadian dollar has found reason to stabilize,” Tihanyi and Camilla Sutton, Scotia Capital’s chief currency strategist, wrote in a Nov. 26 research report.

On days when the trade-weighted U.S. dollar rose at least 0.6 percent, the Canadian dollar performed better versus other major currencies during the past two months than it has since January 2007, the report said. The reverse is also true, with the loonie the worst-performing major currency on days when the trade-weighted U.S. dollar lost at least 0.8 percent, the Scotia Capital report showed.

Negative Surprise

The pattern doesn’t hold on days when Canadian economic data show a negative surprise, as it did today, Tihanyi said.

The best performer this month against the U.S. dollar among the most-traded currencies tracked by Bloomberg is the Taiwan dollar, having gained 0.5 percent to 30.481. All of the other major counterparts including the loonie have fallen in November.

The Conference Board’s confidence index for the U.S. increased this month to 54.1, exceeding the median forecast in a Bloomberg News survey, from a revised 49.9 in October, figures from the New York-based research group showed today. Measures of employment and income expectations improved.

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