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Canadian Dollar Drops Most in a Week as Cyprus Levy Sours Risk

March 18 (Bloomberg) -- The Canadian dollar posted its biggest drop in more than a week against its U.S. peer as a proposed levy on deposits in Cyprus’s banks threatened to throw Europe back into crisis, souring risk appetite.

The currency pared losses after data showed foreign appetite for Canadian bonds rebounded in January, led by the largest monthly purchase of corporate debt in more than a decade. Cypriot lawmakers delayed voting on a 5.8 billion euro ($7.5 billion) levy demanded by fellow euro-zone countries to secure a bailout aimed at preventing financial collapse and a possible exit from the shared currency. The U.S. Federal Open Meeting Committee begins a two-day policy meeting tomorrow.

“This week the dominating factors are going to be how the Cyprus situation is handled and the FOMC,” said David Doyle, a strategist at Macquarie Capital Markets by phone from Toronto. “People think there’s some momentum behind that shift in transactions and there could be more foreign money heading into Canada. People trying to front-run that and trying to get ahead of those fund flows would likely give a bit of a boost to the loonie.”

The loonie, as the Canadian dollar is known for the image of the C$1 coin, fell 0.4 percent to C$1.0222 per U.S. dollar at 5:00 p.m. in Toronto, after earlier sliding 0.6 percent, its biggest drop since March 6. One loonie buys 97.83 U.S. cents.

Bonds Rise

Canada’s benchmark 10-year government bonds rose, with yields falling three basis points, or 0.03 percentage point, to 1.86 percent. The 2.75 percent security maturing in June 2022 gained 30 cents to C$107.49.

The Bank of Canada will auction C$3.3 billion ($3.2 Billion) of two year bonds maturing in May 2015 with a coupon of 1 percent on March 20.

The loonie weakened along with the dollars of Australia and New Zealand, fellow commodity-exporting nations, as futures on crude oil declined as much as 1.8 percent, the most since March 1, before rising 0.3 percent to $93.74 per barrel in New York. The Standard & Poor’s GSCI Index of 24 commodities slid 0.3 percent.

The Aussie fell 0.1 percent to $1.0402 after dropping 0.7 percent, and the so-called kiwi declined 0.1 percent to 82.68 U.S. cents after also sliding 0.7 percent.

The FOMC will make its next decision on the Federal Reserve’s interest rate on Match 20, with all 43 economists in a Bloomberg survey predicting the benchmark rate will stay at zero to 0.25 percent.

Foreign Investment

“It’s kind of like the ‘Life of Pi’ -- we’re all in the boat waiting for something to happen, and it’s really not happening,” said Dean Popplewell, head analyst in Toronto at the online currency-trading firm Oanda Corp., referring to the Academy Award-winning film. “The rest of the world seems more interesting than what’s happening in Canada right now.”

Investors abroad acquired a net C$11.9 billion of bonds and sold C$241 million of money-market paper in January, while also purchasing C$1.66 billion of equities, Statistics Canada said today from Ottawa.

Corporate-debt purchases of C$10.3 billion in January included C$7.23 billion of bonds and C$3.05 billion of money-market securities, the largest total since October 2001, according to the report.

The S&P 500 Index of U.S. stocks declined 0.6 percent as the 30-day rolling correlation between the index and the loonie was 0.48, almost the highest point in six weeks. When the correlation reading is 1, the two securities move in lockstep.

Risk Correlation

“We seem to be back to the good old risk-on, risk-off trading,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank, said by phone from Toronto. “The correlation between the Canadian dollar and risk assets weakened substantially in the beginning of the year, but those correlations seem to have picked up substantially over the course of the past few weeks, and I think the clear focus is the uncertainty of this situation in Cyprus.”

The loonie has lost 0.4 percent this year against nine other developed nation currencies tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar has gained 3 percent and the Japanese yen has lost 7.2 percent.

To contact the reporter on this story: 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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