Canadian Dollar Drops For Fifth Day on Weakening Commodities

The Canadian dollar declined for the fifth day amid concern that weakening commodity prices may signal slowing economic growth.

The dollar fell 0.3 percent to C$1.0231 at 3:16 p.m. in Toronto, from C$1.0198 on July 25. The loonie, as the currency is known because of the bird on the one-dollar coin, has weakened 2.4 percent so far this year against its U.S. counterpart. One Canadian dollar buys 97.73 U.S. cents.

``Oil is off its high,'' said John McCarthy, director of currency trading at ING Financial Markets LLC in New York. ``Commodity currencies have suffered a little bit. It does make some sense when you consider the global economy is slowing a bit.''

Commodities account for about half of Canada's exports. Crude oil has dropped 18 percent since hitting a record high of $147.27 a barrel on July 11. Oil rose 1 percent today. Alberta has the largest crude reserves outside the Middle East.

``Commodities are generally under pressure,'' said Maria Jones, a trader at TD Securities in Toronto. ``While the domestic picture is strong, it's been the net exports that have been a drag on economic growth.''

The Canadian dollar will weaken to C$1.06 in the first quarter of 2009, according to the median estimate of 28 economists surveyed by Bloomberg News. The currency has weakened against 12 of the 16 most actively traded currencies this month.

David Bradley, director of foreign exchange trading at Scotia Capital Inc. in Toronto, a unit of Canada's third-largest bank, said the Canadian dollar will end the year stronger than the U.S. dollar.

Stronger Dollar

``Our forecast is that the Canadian dollar will be stronger at 98 cents,'' Bradley said. ``As much as we rely on our exports sector and exports in the U.S., our economy is not as in as bad of shape. Our housing markets are in better shape. We are in a commodity rich economy. The commodity market is still fine. Even though oil and gold have come off, that will make the Canadian economy stronger than the U.S.''

Gross domestic product reports will be released for both the U.S. and Canada on July 31. Canada's economic growth likely slowed to 0.2 percent in May, from a 0.4 percent in April, according to the median estimate of 24 economists in a Bloomberg survey. The U.S. likely expanded at a 2.3 percent annualized pace in the second quarter, a separate survey shows.

The Canadian dollar's relationship to commodities has weakened in recent months as investors became more concerned that widening credit market losses will hamper growth, said Stewart Hall, a market strategist at HSBC Securities Canada in Toronto.

`Second Fiddle'

``The commodity story is playing second fiddle to the broader credit story, or the market dislocation story, and the ebb and flow of those events,'' Hall said. ``That which is bad for the U.S. is potentially bad for Canada. Today there is an overall North American soft dollar picture expressing itself.''

The yield on the two-year government bond fell 8 basis points, or 0. 08 percentage point, to 3.06 percent. The price of the 3.75 percent security due in June 2010 rose 13 cents to C$101.21. The yield on the 10-year government bond fell 6 basis points to 3.78 percent.

Canada's two-year bond yield will rise to 3.25 percent by the end of this year, with the 10-year yield increasing to 3.85 percent, according to the median forecast in a Bloomberg survey.

The U.S. 10-year Treasury note yielded 25 basis points more than the comparable-maturity Canadian bond, narrowing from 39 basis points on June 25.

Canadian government bonds have returned 2.7 percent this year. U.S. Treasuries have returned 1.8 percent in 2008, according to Merrill Lynch & Co. index statistics.

http://www.bloomberg.com/apps/news?pid=20601082&sid

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Canadian Dollar Drops For Fifth Day on Weakening Commodities