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Canadian Dollar Weakens on Speculation Economic Pace Has Slowed

The Canadian dollar fell against 12 of its 16 most-traded currencies on speculation the nation’s economic growth has slowed and the Bank of Canada will refrain from increasing interest rates.

The loonie, as the currency is nicknamed, strengthened for a second day versus its U.S. counterpart. The currency fell last week after Canada reported 54,500 fewer jobs in March, the biggest monthly employment decline since the country was in recession in 2009. It strengthened earlier today against the U.S. dollar as a report showed housing starts exceeded forecast last month.

“We are in a period of weakness for the currency,” said Mark Chandler, head of fixed-income strategy at Royal Bank of Canada’s RBC Capital Markets unit, by phone from Toronto. “There is a chance that the Bank of Canada could drop its tightening bias in the next meeting. And even if they don’t, they will deliver a more dovish statement. The currency will stay weak and bond yields low, until momentum picks up in the economy.”

The loonie was little changed at C$1.0164 per U.S. dollar at 5:10 p.m. in Toronto. One loonie buys 98.39 U.S. cents.

Economists surveyed by Bloomberg predict Canada’s economy will expand 1.65 percent in 2013, compared with growth of 1.9 percent in the U.S.

Central Bank

The Bank of Canada’s March 6 policy statement called for the economy to “pick up through 2013” on its way to 2 percent annual growth. The central bank reduced its forecast in January from an October prediction of 2.3 percent, and said the economy will reach full output in the second half of 2014, at least six months later than it previously forecast.

The central Bank has kept its benchmark interest rate at 1 percent since September 2010.

Yields on Canadian benchmark 10-year government bonds dropped to 1.77 percent today from 2.07 percent on Feb. 4. The benchmark hit a six-decade low of 1.565 percent on July 23, 2012, according to data compiled by Bank of Canada and Bloomberg. The 1.5 percent note maturing in June 2023 dropped 8 cents today to C$97.49.

The Bank of Canada will auction C$2.7 billion ($2.7 billion) of securities maturing August 2016 tomorrow.

BlackRock Inc. predicted Canadian 10-year benchmark bond yields may fall to the lowest since at least the 1950s as a sputtering economy douses expectations the Bank of Canada will increase borrowing costs this year.

BlackRock View

Slowing growth will cap yields at 1.25 percent to 1.75 percent for the remainder of the year, buoying prices of longer-maturity securities, according to Aubrey Basdeo, head of Canadian fixed-income at the world’s biggest money manager’s Toronto unit.

“The Canadian economy will remain weak as a result of intensifying domestic and external headwinds,” Basdeo said in a telephone interview yesterday. “You should be positioned for a long bias rather than a short bias at this point.”

The 25-basis point reduction puts BlackRock’s yield call below any forecast in Bloomberg surveys of economists, which range from 1.7 percent to 3 percent yields by the end of the year and average 2.34 percent.

A report showed Canadian building permits rose for a second month in February on a rebound in non-residential projects. The value of municipal permits rose 1.7 percent to C$5.95 billion, Statistics Canada said today in Ottawa. Economists forecast a 3 percent gain according to the median of nine responses to a Bloomberg survey.

“For a long time, the domestic economy was doing better than the global economy, but now, the global economy is finding its footing and the Canadian economy is continuing to weaken, which suggests the Bank of Canada will stay on hold,” said David Watt, chief economist at the Canadian unit of HSBC Holdings Plc., by phone from Toronto.

The Canadian dollar has lost 0.7 percent this year against nine other developed-nation currencies tracked by the Bloomberg Correlation Weighted Index. The U.S. dollar gained 2 percent and the euro rose 1.1 percent.

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