By Chris Fournier Oct. 24 (Bloomberg) -- Canada's currency is headed for its worst monthly fall since at least 1950 and the yield on the two- year bond touched the lowest in almost two decades on speculation the economic slump will deepen and oil will decline further. The loonie, as the currency is known because of the aquatic bird on the one-dollar coin, touched the lowest since September 2004. Crude accounted for 10 percent of Canada's export revenue in 2007. ``We're right off the charts in terms of how big this decline is,'' said Doug Porter, deputy chief economist with BMO Capital Markets in Toronto. ``We continue to see tremendous volatility in all financial markets and that's most definitely affecting the currency markets as well.'' Canada's dollar declined as much as 2.9 percent to C$1.2842 per U.S. dollar, from C$1.2472 yesterday, the lowest since Sept. 23, 2004. It traded at C$1.2720 at 1:01 p.m. in Toronto. One Canadian dollar buys 78.62 U.S. cents. The currency is down 7.1 percent since Oct. 17, poised for a fourth straight weekly decline, the longest losing streak in almost a year. The loonie has dropped 16 percent since Sept. 30, the most in a month since 1950, according to Bloomberg and Bank of Canada data. The Canadian dollar was fixed to the U.S. currency from the founding of the country's central bank in 1939 until after World War II, according to the bank's Web site. It was allowed to float from 1950 until 1962, and then again from June 1970. `Incredible Weakness' ``Overnight we've seen the Canadian dollar go from a little burst of strength to incredible and further weakness,'' Porter said. ``The two main drivers here are risk aversion by investors everywhere in the face of what look to be very weak equity markets. But also there seems to be a lack of liquidity in markets which is amplifying the moves we're seeing in all currencies.'' The loonie's second-largest monthly drop was 6.2 percent in November 1976, after Quebec, the country's second-most populous province, elected the separatist Parti Quebecois, ``prompting markets to make a major reassessment of the Canadian dollar's prospects,'' wrote James Powell, author of a book on the history of the currency. The drop this month is also larger than any annual decline since 1950. The currency fell 9.1 percent in 1992. This year, the loonie has depreciated by more than a fifth. Crude oil dropped as much as $5.19, or 7.7 percent, to $62.65 a barrel. Crude reached a record $147.27 on July 11. Since then, the loonie has lost 20 percent. Alberta's oil-sands, about 750 kilometers (466 miles) northeast of Calgary, are estimated by the provincial government to hold the largest oil reserves in the world outside Saudi Arabia. `Risk Aversion' ``Commodity prices are rumbling away in the background and that's definitely one of the factors weighing on the Canadian dollar,'' Porter said. ``That's tied in with the risk aversion story.'' Porter predicts the currency will strengthen to C$1.17 or C$1.18 in 12 months, although ``you have to be a very brave person to say when it's going to bottom.'' The MSCI World Index lost 4.9 percent to 866.48, extending this week's retreat to 8.9 percent. ``There are so many things happening, between commodity prices and absolute market panic on the equity side,'' said Eric Lascelles, chief economics strategist at TD Securities Inc. in Toronto. ``There are some pretty big drivers out there right now, including rampant pessimism and flight-to-safety flows.'' Canada's dollar has outperformed the commodity-based currencies of South Africa, Australia, Brazil, Mexico and New Zealand this month. Against the loonie, the rand slumped 11.2 percent, the Aussie weakened 6 percent, the real depreciated 2.2 percent, the peso was down 2.8 percent and the New Zealand dollar dropped 0.5 percent. Commodity Price Index The Bank of Canada Commodity Price Index, which comprises 23 raw materials produced in Canada such as crude, natural gas and aluminum, fell for a fourth week. ``Canada continues to be buffeted by global financial-market dislocations, hampering recovery prospects,'' Citigroup Global Markets Inc.'s Dana Peterson wrote in a note. ``Canadian financial conditions have soured, exports are impaired by flagging U.S. domestic demand, and commodity price declines and volatility are diminishing terms of trade.'' The Bank of Canada may cut its target rate to 1 percent before the spring of 2009 because of ``dim growth prospects and a benign inflation outlook,'' the New York-based economist wrote. Citigroup predicts the Canadian dollar will strengthen to C$1.23 within three months. Economic Growth Economic growth will slow to 0.6 percent this year, the least since 1991, the Bank of Canada said yesterday. The bank cut borrowing costs by 25 basis points to 2.25 percent on Oct. 21, after lowering rates by 50 basis points on Oct. 8 in conjunction with other central banks around the world. ``Can the U.S. dollar still go higher against the Canadian dollar? Why not?'' CIBC World Markets' Adam Fazio in New York and Shane Enright in Toronto wrote in a note to clients. Citing ``panic-induced markets,'' the strategists said the loonie could weaken to C$1.30 this month. The yield on the Government of Canada two-year note fell below 2 percent for the first time since at least 1989, when Bloomberg records begin. The yield on the two-year note fell 3 basis points, or 0.03 percentage point, to 2.09 percent. Earlier it touched 1.991 percent. The price of the 2.75 percent security due in December 2010 rose 6 cents to C$101.36. The 10-year note's yield fell 1 basis point to 3.61 percent. The price of the 4.25 percent security maturing in June 2018 added 11 cents to C$105.20. To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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