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Canadian Dollar Falls for First Time Since September on Europe

Canada’s dollar had its first weekly drop since September against its U.S. counterpart as concern European leaders are struggling to contain Greek turmoil crimped demand for riskier assets such as stocks and commodities.

The currency fell versus most of its 16 major counterparts tracked by Bloomberg in the first days of November as a report showed Canada’s jobless rate unexpectedly climbed last month. Yields on 10-year government bonds fell the most since the depths of the financial crisis almost three years ago. Canada will sell two-year bonds next week.

“The commodity currencies have come under pressure on the lack of market confidence in this Greek situation,” said Blake Jespersen, director of foreign exchange at Bank of Montreal in Toronto, in a telephone interview. “Lots of investors took money off the table as soon as the political rumblings out of Greece erupted this week. The money hasn’t come back. The jobs number added to the downward momentum in the Canadian dollar.”

Canada’s currency, also known as the loonie for the image of the aquatic bird on the C$1 coin, depreciated 2.7 percent this week to C$1.0188 per U.S. dollar after falling yesterday to C$1.0229, the weakest level since Oct. 20. One Canadian dollar buys 98.16 cents.

Volatility in the Canadian dollar versus the greenback rose this week after reaching the lowest level in more than a month last week. One-month implied volatility on the currency pair ended yesterday at 12.81 percent, compared with 10.98 the week before. It climbed as high as 15.99 percent Oct. 4. The average over the past five years is 11.69 percent.

Volatility Gauge

Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

The loonie dropped as Germany’s Chancellor Angela Merkel said yesterday Group of 20 leaders were unable to agree on committing fresh cash to the International Monetary Fund for it to lend to Europe’s bailout facility. Stocks declined worldwide this week as Greek Prime Minister George Papandreou’s now-abandoned referendum call renewed concern the country may go into disorderly default.

“If things don’t work out in Greece, it will be hunker-down time,” said David Watt, a senior currency strategist at Royal Bank of Canada’s RBC Capital Markets in Toronto, in an e-mail message.

Canada’s government bonds rallied, pushing 10-year note yields down 27 basis points, or 0.27 percentage point, to 2.16 percent this week in the biggest five-day drop since December 2008. The price of the 3.25 percent securities maturing in June 2021 rose C$2.38 to C$109.38.

Two-Year Yields

Two-year bond yields fell 16 basis points to 0.93 percent in their first drop since the five days ended Sept. 23. They touched 1.96 percent in February.

Canada will sell C$3.5 billion ($3.4 billion) of 1 percent bonds due on February 2014 on Nov. 9, according to the Bank of Canada’s website. The previous auction of two-year bonds on Oct. 19 produced an average yield of 1.097 percent and a bid-to-cover ratio of 2.38, compared with a five-auction average of 2.47, Bank of Canada figures show.

Government bonds have returned 7.7 percent this year, poised for the biggest annual gain since 2008, according to a Bank of America Merrill Lynch index.

Employment fell by 54,000 jobs last month after an increase of 60,900 positions in September, Statistics Canada said yesterday. The median forecast of 27 economists in a Bloomberg News survey was for an advance of 15,000. The unemployment rate rose to 7.3 percent from 7.1 percent, where economists had expected it to stay.

‘Disappointing Number’

“That was a hugely disappointing number,” said David Love, a trader of interest-rate derivatives at Le Groupe Jitney Inc. in Montreal, via e-mail.

Chances of an interest rate cut at the central bank’s Dec. 6 meeting rose to 18 percent after the jobs figures were released, from 11 percent at the end of last week, according to Bloomberg calculations based on overnight index swaps.

The Standard & Poor’s 500 Index fell 2.5 percent this week after rising 11 percent in October, the most since 1991. The Reuters/Jefferies CRB Index of raw materials decreased 0.8 percent this week.

The Canadian dollar’s recent decline to the C$1.01 to C$1.02 range “may entice investors and reserve managers who are looking at strategic opportunities to increase their exposure to the Canadian dollar,” Kiran Kowshik, a currency strategist at BNP Paribas SA in London, wrote in a note to clients. He recommends selling the U.S. dollar at C$1.0195, targeting a move back to 98 Canadian cents over one to two months. Investors should abandon the trade at C$1.04, according to BNP Paribas.

The loonie has dropped 5 percent this year in the worst performance among 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The greenback is down 2.5 percent. The Swiss franc is up 3.7 percent in the best performance.

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