Canadian Currency Touches Three-Week Low as Global Stocks Drop

Canada’s dollar fell for a second week as global stocks slid and its U.S. counterpart gained against most major currencies on signs the American economic recovery is gaining traction.

The Canadian dollar touched the weakest level since Nov. 27 after the nation’s central bank chief reiterated a pledge to keep the benchmark interest rate at a record low through June. The loonie, as the currency is nicknamed, was still the third- best performer among the 16 most-traded currencies tracked by Bloomberg. Retail sales in Canada rose in October for the third straight month, the government is forecast to report next week.

“It’s clearly a dollar play right now,’’ said Fabian Eliasson, head of U.S. currency sales at Mizuho Corporate Bank Ltd. in New York, referring to the greenback. “I look to the Canadian to strengthen against the other majors continuously, mainly based on recovery, continued high commodity prices and a fairly strong U.S. dollar.”

The Canadian currency depreciated 0.6 percent to C$1.0664 per U.S. dollar yesterday in Toronto, from C$1.0601 on Dec. 11, when it posted a 0.2 percent drop for the previous five days. It weakened to C$1.0747 on Dec. 17. One Canadian dollar purchases 93.77 U.S. cents.

Investors should sell the Australian dollar versus the Canadian because “the liquidity party is over,” Morgan Stanley analysts including Emma Lawson in London and Yilin Nie in New York wrote in a note to clients yesterday.

‘Most Overvalued’

“We view the Australian dollar as the most overvalued currency among the Group of 10, while the Canadian dollar has lagged,” they wrote. “The Bank of Canada is likely to hike more than the market currently expects,” while the Reserve Bank of Australia is signaling a slowdown in rate increases.

The so-called Aussie was the worst performer last week among the most-traded currencies. The Mexican peso was the top performer, and the greenback was No. 2.

The Canadian central bank’s conditional pledge to keep its overnight lending rate at 0.25 percent, the lowest ever, until June remains in force, Governor Mark Carney said this week in Toronto. Morgan Stanley’s Nie wrote in a note on Dec. 10 that the bank instead may begin raising the rate in April as an economic recovery in the U.S. gathers speed and inflation picks up faster than it forecast.

The U.S. Federal Open Market Committee said Dec. 16 it will keep its benchmark rate at a range of zero to 0.25 percent for an “extended period,” even as it also said economic conditions improved. The Federal Reserve said the previous day that factories produced more goods last month than forecast.

‘Good for Canada’

Canada and the U.S. share the world’s largest trading relationship, estimated at $1.5 billion a day in goods, according to the U.S. Commercial Service Web site. Labor Department data released Dec. 4 showed the U.S. unemployment rate unexpectedly fell to 10 percent in November from a 26-year high of 10.2 percent the previous month.

“What’s good for the U.S. is good for the Canadian dollar,” said Eliasson. “If we see the recovery is gaining strength and unemployment is coming down in the U.S. and people are looking at 2010 as a continued recovery, that’s going to be good for the Canadian dollar as well because they’re so dependent on exports to the U.S.”

While that will help the Canadian currency gain against most major counterparts, he said, the loonie will face “a tough battle” to appreciate against the U.S. dollar.

Canada’s currency will strengthen to C$1.03 by the end of March, according to the median forecast of 36 analysts surveyed by Bloomberg News. It rose 14 percent this year.

Bonds Fall

Canada’s government bonds fell this week. The yield on the benchmark 10-year note rose two basis points, or 0.02 percentage point, to 3.41 percent. The price of the 3.75 percent security due in June 2019 dropped 18 cents to C$102.76. The two-year note’s yield increased seven basis points to 1.3 percent.

The MSCI World Index, a gauge of stocks in 23 developed nations, fell 1 percent this week, its second straight five-day loss. The Standard & Poor’s 500 Index dropped 0.4 percent.

Retail sales in Canada rose 0.8 percent in October after climbing 1 percent in both September and August, the government’s statistics agency will report on Dec. 21, according to the median forecast of 19 economists surveyed by Bloomberg.