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Loonie’s Worst Year May Extend Into 2009 Amid Oil’s Collapse

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Loonie’s Worst Year May Extend Into 2009 Amid Oil’s Collapse 

By Chris Fournier

Dec. 30 (Bloomberg) — Canada’s currency may extend its biggest annual decline on record, as tumbling crude prices hobble foreign investment in the country’s oil patch, according to the world’s biggest strategists and economists.

The Canadian dollar fell 18 percent this year as a global recession cut demand for commodities, which generate half the country’s exports. Canada’s current-account surplus, the broadest measure of trade, will turn into deficit in 2009, said Toronto- based Scotia Capital Inc., a unit of Canada’s third-biggest bank.

“A scaling back of foreign direct investment is a negative for the Canadian dollar,” said Eric Lascelles, chief economics strategist in Toronto at TD Securities Inc., a unit of Canada’s second-largest bank. “If there is less investment in oil sands, there will be less production and less exporting down the road,” he said, referring to the world’s biggest energy pool outside Saudi Arabia.

Canada’s dollar, dubbed the “loonie” for the aquatic bird on the one-dollar coin, may weaken to C$1.28 by the end of the first quarter from C$1.2221 yesterday, according to the median estimate of 42 analysts and economists surveyed by Bloomberg. It may end 2009 at C$1.24, the poll’s results show. One Canadian dollar buys 82.24 U.S. cents.

Deutsche Bank AG of Frankfurt, the world’s biggest currency trader, forecasts the Canadian dollar will weaken to C$1.30 by the end of 2009, while Zurich-based UBS AG, the second-biggest trader, sees it depreciating to C$1.33.

Bad ‘Signal’

“Foreign companies will be very unlikely to start new projects unless the price of oil rebounds,” said Dustin Reid, director of currency strategy at RBS Global Banking & Markets in Chicago. “It clearly is not a good signal for the Canadian dollar from a longer-term perspective.”

Royal Dutch Shell Plc, based in The Hague, and StatoilHydro ASA, Norway’s biggest oil producer, are among companies that deferred or canceled at least 14 projects this year in Alberta’s oil sands. Oil collapsed more than $100 since July to a low of $32.40 a barrel, less than half the price needed to make oil- sands projects economically viable, according to estimates by the Canadian Association of Petroleum Producers.

A $1 drop in oil prices lowers the Canadian dollar by 0.3 cent against the U.S. dollar, according to analysis this month by TD Securities. Crude is the largest component of the Bank of Canada’s Commodity Price Index, accounting for 21 percent. The Paris-based International Energy Agency, an adviser to 28 nations, said this month that global oil demand contracted in 2008 for the first time since 1983 and cut its outlook for 2009.

Reaching Parity

This year’s decline came after Canada’s currency reached parity with its U.S. counterpart in September 2007 following a 60 percent climb in the prior five years that was fueled by rising commodity prices. Foreign investment in Canada’s energy industry jumped by almost half in that period to C$86.7 billion ($71.4 billion), according to Statistics Canada in Ottawa.

Much of that money was pegged to western Canadian oil sands, the site of 175 billion barrels of proven reserves, according to the province’s Energy Resources Conservation Board. Oil-sands projects will be profitable if crude is priced at $95 to $100 a barrel in coming decades, said Ryan Todd, a Deutsche Bank analyst in New York.

“Much of the activity in the oil patch was investment, not production,” said David Watt, a senior currency strategist at RBC Capital Markets in Toronto. “That production is set to start in coming years but recent decisions on mothballing put some risk into that conclusion.”

RBC expects Canada’s dollar to weaken to $C1.31 by mid-2009 before ending the year at C$1.25.

‘Support Level’

Efforts by governments, including an economic stimulus plan being put together by U.S. President-elect Barack Obama, to stem a worldwide recession may bolster the currency, according to Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. He said Canada’s dollar may break through its “support level” of C$1.1980 and rally to C$1.15.

“I’m becoming more bullish on the Canadian dollar as long as equity markets and energy markets stabilize,” Spitz said. There may be “added momentum should Obama underscore recent comments with respect to less reliance on Middle-East oil.”

Strategists at CIBC World Markets, part of Canada’s fifth- largest bank, predicted last week the loonie will strengthen to C$1.18 by mid-year before finishing 2009 at C$1.09.

Political turmoil and falling interest rates may hinder any recovery in the currency.

Prime Minister Stephen Harper’s minority government may fall next month if an opposition coalition votes against his budget, due to be presented in parliament on Jan. 27.

Falling Rates

The Bank of Canada on Dec. 9 reduced the target rate for overnight loans between commercial banks by 0.75 percentage point to 1.5 percent, the lowest since 1958. The central bank will cut the benchmark to 1 percent next quarter, according to the median estimate of 11 economists surveyed by Bloomberg.

Another drawback for the currency is that the country’s bonds are losing their allure. Two-year Canada bonds yield about 34 basis points, or 0.34 percentage point, more than Treasuries, down from almost 100 basis points as recently as October.

Canada’s current-account surplus, which includes investment in the nation’s securities, is already dwindling, shrinking by almost a third between July and September as profits that companies earned abroad fell and exports slowed.

Receipts from outside Canada exceeded payments sent abroad by C$5.64 billion last quarter, down from C$8.21 billion in the previous three-month period, Statistics Canada said Nov. 28.

In 1997 and 1998, the last time the current account was in deficit, the Canadian dollar weakened to C$1.5382 from C$1.3705.

“A deficit can only mean bad things for the currency,” said Carlos Leitao at Montreal-based Laurentian Bank Securities, who was ranked second among the world’s most accurate economists in a survey by Bloomberg News last month. “If oil remains in this range of $40 or even less, the Canadian dollar won’t be going up.”

To contact the reporter on this story: Chris Fournier in Montreal at[email protected]

Last Updated: December 30, 2008 00:00 EST

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