Canadian dollar - Investor's Paradise

By Haris Anwar

Aug. 14 (Bloomberg) -- The Canadian dollar fell the most in 14 months as U.S. subprime debt losses spread to Canada, darkening the outlook for some local financial firms and the nation's economy.

Banks are refusing to supply more than C$1 billion ($940 million) in emergency financing for as many as 17 Canadian asset- backed commercial paper issuers, including funds run by Coventree Inc., after they failed to sell short-term debt, according to company filings and ratings companies. Gold, silver and copper fell today. Commodities make up about half of Canada's exports.

``The global environment has turned sour against the Canadian dollar,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``Anything that's perceived attached strongly to the global growth cycle is getting hit badly.''

Canada's dollar declined 1.2 percent, the most since June 2006, to 93.71 U.S. cents at 4:08 p.m. in Toronto. One U.S. dollar buys C$1.0672. The Canadian dollar has dropped 2.3 percent since July 25, when it reached a 30-year high.

Government bonds gained as investors bought safer assets. The yield on Canada's two-year bond fell 12 basis points, or 0.12 percentage point, to 4.30 percent, the lowest since mid-May. It's the biggest drop in yield since September 2005. The price of the 3.75 percent security due in June 2009 rose 20 cents to C$99.05. Bond yields move inversely to prices.

Carry Trade

The currency fell 1.5 percent against the yen as investors exiting carry trades bid up the price of the Japanese currency. All 16 most actively traded currencies fell against the yen. The carry trade is a strategy in which investors borrow in Japan, where the benchmark lending rate is 0.5 percent, to buy higher- yielding assets in economies such as Canada, where the lending rate is 4.50 percent.

Coventree, the Canadian firm that failed to sell asset- backed commercial paper because of a credit crunch, said some lenders balked at providing emergency funding for C$700 million ($661 million) of maturing debt. Coventree's funds are among 17 asset-backed commercial paper issuers in Canada seeking emergency funding, said rating company DBRS.

The drop in Canada's currency began after a government report showed Canada's trade surplus narrowed more than analysts forecast. Canada's trade surplus in June narrowed to C$5.27 billion from C$5.87 billion a month earlier, Statistics Canada said today in Ottawa. Economists had forecast a drop to C$5.6 billion, according to the median estimate in a Bloomberg survey.

Slowing export growth may reduce demand for the local currency.

Trade Surplus

The ``trade numbers are not encouraging investors to buy the Canadian dollar,'' said David Powell, a currency strategist at IDEAglobal in New York. ``The recent market turmoil has put into question whether a rate hike will materialize in September,'' said Powell, who expects the Bank of Canada won't raise interest rates at its Sept. 5 meeting.

The Bank of Canada on July 10 increased the benchmark lending rate a quarter-percentage point to 4.5 percent after a pause of more than a year, and said a ``modest'' further increase may still be needed.

Investors in the futures market almost eliminated bets that the Bank of Canada will raise rates. The September bankers' acceptances futures contract yielded 4.63 percent, down from 4.86 percent on July 25. The futures have settled at a three-month lending rate averaging 16 basis points above the central bank's target since Bloomberg started tracking the data.