By Allison Bennett and Chris Fournier Jan. 23 (Bloomberg) -- The Canadian currency weakened the most since October as uncertainty over U.S. banking regulations, China’s monetary policy and Greece’s finances dulled investors’ appetite for higher-yielding assets. Canada’s dollar fell against most of its major counterparts as stocks tumbled and crude oil, the nation’s biggest export, dropped. The Bank of Canada kept interest rates at a record low and repeated concern that the currency’s strength is hampering the nation’s economy. Gross domestic product grew in November for a third month, a report is forecast to show next week. “Quite simply, the market was extremely long Canada,” said Michael O’Neill, managing director at Knightsbridge Foreign Exchange Inc. in Toronto. A long position is a bet a currency will appreciate. “The fact there was a bit of risk aversion coming back into the market because of the Obama tax on banks, plus will-China-keep-tightening, that all put Canada in a bit of a negative light.” The Canadian currency, nicknamed the loonie, depreciated 2.7 percent, the most since the five days ended Oct. 30, to C$1.0578 per U.S. dollar yesterday in Toronto, compared with C$1.0291 on Jan. 15. It gained 16 percent last year. One Canadian dollar buys 94.54 U.S. cents. Government bonds climbed, pushing down the yield on Canada’s benchmark 10-year note this week by 13 basis points, the most since the five days ended Nov. 27, to 3.37 percent. A basis point is 0.01 percentage point. The price of the 3.75 percent security due in June 2019 increased C$1 to C$103.01. ‘Risk Aversion’ Global demand for higher-yielding currencies flagged on concern China will slow its growth and Greece will fail to contain its budget deficits within the European Union’s limits. “Risk aversion seems to be breaking out again, and the Canadian dollar never performs well in that environment,” said Christian Dupont, a currency trader at Desjardins Group in Montreal. China will raise interest rates by the end of June and increase banks’ reserve requirements, according to the median forecasts of 17 economists surveyed by Bloomberg. European finance ministers said on Jan. 19 the fiscal crisis in Greece is affecting other nations. U.S. President Barack Obama’s plan to stem proprietary trading and hedge-fund investments at banks spurred concern that a recovery in Standard & Poor’s 500 Index earnings from a record nine-quarter slump will be threatened. Stocks slid for a second week. The S&P 500 Index retreated 3.9 percent for the week, the most since October, after a 0.8 percent loss last week. The MSCI World Index, a measure of equities in 23 developed countries, dropped 3.8 percent. ‘Finding a Bottom’ “Stocks are finding a bottom, removing pressure on the Canadian dollar,” said Alexandre Belzile, director of foreign- exchange trading at Laurentian Bank of Canada in Montreal. “Correlation to the stock market is intact in 2010.” Crude oil for March delivery dropped 4.4 percent to $74.54 a barrel in New York and touched $74.01, the lowest level in a month. Raw materials including oil account for half of Canada’s export revenue. The Canadian currency tends to track equities and commodities. Its 30-day correlation with the MSCI World Index is 0.74, and the figure is 0.55 for the S&P 500 and 0.48 for crude oil. A reading of one would indicate they move in lockstep. Bank of Canada policy makers said Jan. 19 the benchmark interest rate would remain at a record low 0.25 percent. They reiterated that the loonie’s “persistent strength” hampers economic recovery and that the rate will remain unchanged through June, barring the outlook for inflation. Missed Forecasts Economic data from Statistics Canada reduced investor speculation the central bank might raise rates earlier. Retail sales decreased 0.3 percent in November from a month earlier, more than forecast in a Bloomberg survey. The consumer price index rose 1.3 percent in December from a year earlier, less than forecast. The yield on the June 2010 bankers’ acceptances futures contract, a barometer of short-term interest rates, has declined 26 basis points this year to 0.56 percent, from 0.81 percent on Dec. 31, indicating traders are paring bets on rate increases. The Canadian currency fell this week against 13 of its 16 most-traded counterparts tracked by Bloomberg as traditional haven currencies gained. The U.S. dollar rose against 15, and the yen climbed against all of them. The drop in the loonie is “definitely an opportunity to get long the Canadian dollar and long some of the commodities as well,” said Aaron Fennell, a futures and currency broker in Toronto at Lind-Waldock, a unit of MF Global Canada. Fennell is buying gold, silver, platinum and palladium as well as the currencies of Canada and Australia. Bond Auction Canada will sell C$3 billion ($2.8 billion) of two-year notes Jan. 27, according to a statement on the Bank of Canada’s Web site. The 1.5 percent securities mature in March 2012. The yield advantage of the Canadian two-year note over the comparable U.S. Treasury note narrowed to 39 basis points, from 42 basis points at the end of last week. The advantage has favored Canadian securities since June. Canada’s gross domestic product increased 0.3 percent in November, according to the median forecast of 18 economists surveyed by Bloomberg. Statistics Canada is scheduled to release the data on Jan. 29. To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Chris Fournier in Montreal at cfournier3@bloomberg.net

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