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Canada Dollar Trades Close to 6-Month Low on Economy, Downgrades

Jan. 28 (Bloomberg) -- The Canadian dollar traded close to a six-month low versus its U.S. counterpart as signs of slower economic growth weighed on demand.

Canada’s dollar remained lower after Toronto-Dominion Bank, Bank of Nova Scotia and four other Canadian lenders had credit ratings cut by Moody’s Investors Service because of high consumer debt and elevated house prices. The currency pared losses earlier today as commodity price strengthened, including crude oil, the nation’s largest export.

“The downgrade is a near-term catalyst for Canadian dollar weakness,” Adam Button, a currency analyst at Forexlive.com, said in a telephone interview from Montreal. “This will only add to negative Canadian dollar sentiment.”

The loonie, as the Canadian dollar is called for the image of the aquatic bird on the C$1 coin, was little changed at C$1.0063 per U.S. dollar at 5 p.m. in Toronto, after reaching its lowest point since July 26. One loonie buys 99.37 U.S. cents.

The Standard & Poor’s GSCI Index of 24 raw materials gained 0.4 percent and crude oil futures rose 0.7 percent to $96.54 a barrel in New York.

Commodities Prices

“On the back of commodity prices, a few speculators have jumped onto the back of the loonie,” Dean Popplewell, head analyst at the online currency-trading firm Oanda Corp., said on the telephone from Toronto. “The meat of fundamental data does not come out until the end of the week, that’s when we will see the real players back in play. A lack of interest in the loonie has found it easy to sway.”

A technical measure indicated its recent decline may have been too far, too fast. The 14-day relative strength index against the U.S. dollar reached 25.6 percent, below the 30 level that some traders see as sign that an asset may be about to reverse direction.

Hedge funds and other large speculators 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 on an advance in the Canadian dollar compared with those on a drop -- so-called net longs -- was 57,952 on Jan. 22, compared with 68,668 a week earlier.

Market Positions

“I think the market was pretty long of Canadian dollars in general and we’re trading through levels that continue to see positions get cut,” Matthew Perrier, director of foreign exchange at Bank of Montreal, said by phone from Toronto. “With the Bank of Canada meeting last week, it’s just taken a little bit of shine off the currency.” A long position is a bet that an asset will increase in value.

Canada’s benchmark 10-year bond fell, with yields rising one basis point, or 0.01 percentage point, to 1.96 percent. The 2.75 percent security maturing in June 2022 fell 12 cents to C$106.72.

The Bank of Canada will auction C$2.9 billion ($2.87 billion) of 10-year notes maturing June 2023 with a 1.5 percent coupon on Jan. 30.

Implied volatility for three-month options on the U.S. dollar versus the loonie touched as high as 6.8 percent, the highest since Nov. 2. Implied volatility signals the expected pace of currency swings and is quoted by traders to set options prices.

The currency fell after a report last week showed Canadian the annual inflation rate held at a three-year low of 0.8 percent in December, keeping it below the bottom of the central bank’s target band, as food and shelter costs moderated.

Central Bank

The Bank of Canada has kept its policy interest rate at 1 percent since September 2010, the longest pause since the 1950s, while lowering the possibility of a rate increase. The bank cut its forecast for growth this year to 2 percent from an October forecast of 2.3 percent, last week.

“The market is still looking at the softer tone from the Bank of Canada last week,” Shane Enright, executive director of currencies at Canadian Imperial Bank of Commerce, said in a telephone interview from Toronto. “You’re seeing rotation out of growth currencies in general.”

Toronto-Dominion, the last publicly traded bank rated AAA by Moody’s, was cut to Aa1, the ratings firm said today in a statement. Bank of Nova Scotia fell to Aa2 and the ratings on Bank of Montreal, Canadian Imperial Bank of Commerce, Caisse Centrale Desjardins du Quebec and National Bank of Canada were lowered by one level.

“High levels of consumer indebtedness and elevated housing prices leave Canadian banks more vulnerable than in the past to downside risks the Canadian economy faces,” Moody’s said in a statement.

The loonie has declined 3.3 percent during the past six months among the 10 developed-nation currencies monitored by the Bloomberg Correlation-Weighted Indexes. The greenback fell 3 percent.

To contact the reporters on this story: Taylor Tepper in New York at ttepper2@bloomberg.net; Ari Altstedter in Toronto at aaltstedter@bloomberg.net

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

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