Canadian dollar weakens below parity as aversion to risk rises

March 6 (Bloomberg) -- Canada’s dollar depreciated versus its U.S. counterpart for a third day as concern the global economy is slowing sapped demand for higher-risk assets such as stocks and commodities.

The currency fell through parity, declining by the most in almost a month, before the nation’s central bank meets in two days to set interest rates. Crude oil, Canada’s biggest export, weakened after Europe’s economy shrank in the fourth quarter.

“Markets have continued to retreat and risk appetite is under pressure,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “Currencies correlated with risk appetite or commodities, which includes the Canadian dollar on both counts, are underperforming.”

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, fell 0.7 percent to C$1.0014 per U.S. dollar at 2:49 p.m. in Toronto after touching C$1.0029, the weakest level since Feb. 27. It fell as much as 0.8 percent, the most in an intraday basis since Feb. 10. One Canadian dollar purchases 99.83 U.S. cents.

Government bonds rose, pushing benchmark 10-year note yields down three basis points, or 0.05 percentage point, to 1.93 percent. The 3.25 percent securities due in June 2021 increased 41 cents to C$111.13.

Two-year yields fell four basis points to 1.08 percent. Canadian government bonds are down 0.24 percent this year, versus losses of 0.9 percent through the same period last year.

Bank of Canada

Europe’s economy contracted 0.3 percent in the fourth quarter, the European Union’s statistics office said, following data yesterday that showed U.S. factory orders declined and China’s announcement of the lowest growth target since 2004.

The Bank of Canada will leave its benchmark interest rate at 1 percent, where it’s stood for more than a year, according to the weighted average of 25 responses in a Bloomberg survey.

Policy makers led by Governor Mark Carney said after the bank’s most recent decision on Jan. 17 growth in Canada and the U.S. will be “more modest” than forecast in October as European leaders struggle to contain a debt crisis.

“I would expect it should be relative steady as she goes,” Stretch said, referring to the central bank’s March 8 decision. “I wouldn’t be expecting too much of a surprise later in the week.”

Stretch recommends “playing the range” in the Canadian dollar between 99.20 cents and C$1.0040 versus the greenback. He said the Canadian currency has potential to make further gains versus the Australian dollar.

The loonie rose for a third day versus the so-called Aussie, trading up 0.6 percent to C$1.0556, the strongest since Jan. 25.

‘More Potential’

“Canada at this point could have more legs,” than the Australian dollar, Alessio de Longis, a portfolio manager at Oppenheimer Funds, said in a Bloomberg Television interview on “Surveillance Midday” with Tom Keene. “Given the slowdown we’re seeing in China, and their expectations for lower growth, the Canadian dollar probably offers more potential.” China is Australia’s biggest trading partner.

The dollars of Canada and Australia are benefiting from higher energy prices and an “insatiable demand” for assets that carry AAA ratings, de Longis said.

The Canadian dollar has gained 0.6 percents over the past three months, the third-best performer after the dollars of Australia and New Zealand at 2.9 percent and 4.2 percent, according to Bloomberg Correlation Weighted Indexes.

Bloomberg News

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