By Chris Fournier Oct. 15 (Bloomberg) -- Canada's currency weakened for a second day as crude oil fell below $75 a barrel and reports showed the U.S. economy may fall into recession. The Canadian dollar has depreciated 13.8 percent since July 11 when crude reached a record $147.27. Canada relies on commodities for about half its export revenue. Its largest trading partner is the U.S. ``We think the trends here are going to continue,'' said Steven Barrow, a currency strategist at Standard Bank Plc in London. The Canadian dollar is being ``undermined by what's happening in commodity prices and affected economically by the slowdown in the U.S.'' The Canadian dollar weakened as much as 1 percent to C$1.1746 per U.S. dollar, from C$1.1624 yesterday. It last traded at C$1.1744 at 10:21 a.m. in Toronto. One Canadian dollar buys 85.16 U.S. cents. Sales at U.S. retailers dropped in September by the most in three years, the Commerce Department said today in Washington. The Federal Reserve's gauge of manufacturing in New York sank to a record low. The U.S. is in a recession, San Francisco Fed President Janet Yellen said in a speech last night. Crude oil for November delivery fell as much as $3.66, or 4.7 percent, to $74.97 on the New York Mercantile Exchange. Last week the Canadian dollar fell the most in at least 37 years. `Deserves to Be Weaker' ``The Canadian dollar deserves to be a weaker currency,'' said Barrow. ``For a long period of time it's been too strong.'' He predicts the loonie, as the currency is known because of the aquatic bird on the one-dollar coin, will depreciate to C$1.25 against the U.S. dollar in six months. ``The plunge is consistent with commodity prices,'' Toronto- based UBS analysts George Vasic and Garry Cooper wrote in a note dated yesterday. They estimate the fair value of the Canadian currency, which since 1996 has a 0.96 correlation with UBS's commodity-price basket, to be C$1.14. A correlation of 1 would mean the currency moves in lock-step with commodity prices. Other commodity-based currencies including those in Mexico, Australia and Brazil also fell against the U.S. dollar as raw- material prices slumped. The peso slipped 2.9 percent, the real dropped 3.1 percent and the Aussie weakened 0.7 percent. Commodity Index The Reuters/Jefferies CRB Index of 19 commodities fell 2.93, or 1 percent, to 292.41 and is down 35 percent in the past three months. Raw materials such as gold account for 60 percent of Australia's exports. Oil generates about 40 percent of the government revenue in Mexico. Brazil is the world's biggest sugar producer and exporter. Canadian Prime Minister Stephen Harper will return to office with more seats in Parliament, though still not enough for a majority government, after winning yesterday's election as the financial crisis spreads north from the U.S. Harper's Conservative Party won 143 districts, according to preliminary results from Elections Canada. Stephane Dion's Liberal Party won 76, followed by the Bloc Quebecois with 50 and the New Democratic Party with 37. Harper held 127 seats in the 308-seat legislature before the vote was called. The stronger showing for Harper, 49, strengthens his hand to control the legislative agenda and deal with the effects of the credit crunch. His first task will be to shore up banks and manage a slowdown in tax revenue that threatens to end a record streak of 11 consecutive budget surpluses. The 10-year note's yield was little changed at 3.82 percent. The price of the 4.25 percent security maturing in June 2018 rose 1 cent to C$103.44. The yield on the two-year government bond rose 1 basis point to 2.33 percent. The price of the 2.75 percent security due in December 2010 slipped 1 cent to C$100.87. To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

Source