Canadian Dollar Depreciates for a Second Day on Risk Aversion

Montreal - Canada’s dollar weakened for a second day against its U.S. counterpart as investors speculated that a rally in higher-yielding assets may be overdone and crude oil dropped.

“Risk aversion is back a little bit,” said Sal Guatieri, a senior economist in Toronto at BMO Capital Markets, a unit of Canada’s fourth-biggest bank. “Commodity prices are generally lower, especially oil. And you have to remember that the Canadian dollar has had quite a run.”

The Canadian currency, nicknamed the loonie, depreciated 1 percent to C$1.0974 per U.S. dollar at 4:36 p.m. in Toronto, from C$1.0868 yesterday. It touched C$1.1000, the weakest level since Aug. 19. One Canadian dollar purchases 91.12 U.S. cents.

The loonie gained 19 percent against the greenback from March 9, when it reached a four-year low. The Standard & Poor’s 500 Index, the benchmark for U.S. stocks, was up by 52 percent in that period. It was little changed today.

“The market has been rallying very aggressively since March,” said Matthew Strauss, a Toronto-based senior currency strategist at RBC Capital Markets, a unit of the nation’s biggest bank. “There’s a concern that the rally in riskier asset classes has been overdone.”

Crude oil for October delivery fell as much as 1.9 percent to $70.67 a barrel on the New York Mercantile Exchange. Crude, Canada’s biggest export, is up 60 percent this year.

China is studying curbs on overcapacity in steel, cement and other industries, adding to concern policy makers may seek to rein in growth fueled by record credit expansion. The government will increase “guidance” of some industries, the State Council, China’s cabinet, said on its Web site today.

‘Caught Long’

The Canadian dollar has performed worse against the greenback this month than all but one of the 16 most-traded currencies tracked by Bloomberg, the pound. The loonie fell 1.8 percent versus the U.S. dollar.

“The market is definitely caught long the Canadian dollar on this move,” said Steve Butler, director of foreign-exchange trading in Toronto at Scotia Capital Inc., a unit of Canada’s third-largest bank. “The herd has been lapping up U.S. dollars.” A long position is a bet a currency will gain.

The Australian and New Zealand dollars, which like Canada’s tend to mirror fluctuations in stocks and commodity prices, lost 1 percent and rose 2.9 percent, respectively, this month against their U.S. counterpart.

‘Successful Auction’

Canada sold C$500 million ($459 million) of real-return bonds, drawing a median yield of 1.78 percent, according to a statement on the Bank of Canada’s Web site. The government received bids of C$1.27 billion for the 2 percent inflation- linked securities maturing in December 2041. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount sold, was 2.54.

“All in all, a successful auction, with little sign of indigestion,” said Eric Lascelles, chief economist and strategist in Toronto at TD Securities Inc., a unit of Canada’s second-biggest bank. “Real-return bonds are in rather short supply in Canada compared to other countries, and this auction is a reflection of that.”

The price of the securities fell 12 cents to C$104.34 in Toronto, pushing up the yield one basis point, or 0.01 percentage point, to 1.82 percent.

Canada’s dollar will weaken to C$1.10 by year-end, according to the median forecast of 35 economists and analysts surveyed by Bloomberg News.

BMO’s Guatieri predicts the loonie will reach parity with the U.S. currency by the end of next year, as the global economy strengthens and commodity prices rise further.

Comments from Bank of Canada Deputy Governor Timothy Lane yesterday that a “persistently strong” Canadian dollar is a risk to economic growth “were enough to cap” the currency’s recent gains, Guatieri said.