Canada’s dollar depreciated against its U.S. counterpart as Standard & Poor’s reduced France’s top sovereign-debt rating, eroding investor demand for riskier assets. The currency strengthened against the euro and advanced 0.5 percent on the week against the greenback. Statistics Canada reported the nation’s trade deficit swung to a surplus in November. “Everything is a sideshow to Europe,� Kathy Lien, director of currency research at the online currency trader GFT Forex, said by phone from New York. “You’re seeing a risk-off move across the board.� The currency, nicknamed the loonie, fell 0.4 percent to C$1.0232 per U.S. dollar at 5 p.m. Toronto time. One Canadian dollar buys 97.74 U.S. cents. It rose 0.7 percent to C$1.2974 against the euro. S&P stripped France and Austria of their top credit ratings in a swathe of downgrades that left Germany with the euro area’s only stable AAA grade, hindering leaders’ efforts to stem the region’s fiscal crisis. France and Austria were cut one level to AA+ from AAA and face the risk of further reductions, the rating company said in Frankfurt today. While Finland, the Netherlands and Luxembourg kept their AAA ratings, they were put on negative watch. Spain and Italy were also downgraded. The first gauge of the report’s impact will come on Jan. 16 when France sells as much as 8.7 billion euros ($11 billion) in bills. Yield Curve Canadian 10-year government bonds advanced, pushing the yield down six basis points, or 0.06 percentage point, to 1.92 percent. The 3.25 percent securities maturing in June 2021 rose 50 cents to C$111.35. The difference in spread between two- and 10-year government bonds narrowed to 97 basis points, the least, or flattest, since September 2008. A flatter yield curve generally indicates a worsening economic outlook. The 10-year yield touched 1.837 percent on Dec. 16, the lowest level in data compiled by Bloomberg going back to 1989. The premium to equivalent-maturity U.S. Treasuries is six basis points, compared with 32 basis points on Sept. 5, the most in 2011. Futures traders increased their bets the Canadian dollar will decline against the greenback, figures from the Washington- based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the Canadian dollar compared with those on a gain -- so-called net shorts -- was 28,649 on Jan. 10, compared with net shorts of 23,371 a week earlier. Unexpected Surplus Canada reported an unexpected surplus as exports of energy and automobiles rose while imports fell. Statistics Canada said the nation ran a surplus of C$1.07 billion ($1.05 billion). Economists surveyed by Bloomberg forecast a C$500 million deficit, based on the median of 19 responses. The trade report is the last major piece of economic data before the central bank’s Jan. 17 interest-rate decision. Governor Mark Carney will probably keep the policy interest rate at 1 percent, where it has been since September 2010, according to economists surveyed by Bloomberg. Canadian provinces are taking advantage of record-low borrowing costs to raise funding amid increasing concern the economic outlook may weaken and the risk of credit-rating downgrades will climb. Borrowing Costs Ontario, Quebec, Manitoba and Nova Scotia sold C$1.8 billion of bonds this week, compared with average weekly domestic issuance of C$1.2 billion in 2011, according to Canadian Imperial Bank of Commerce data. Yields on the Bank of America Merrill Lynch Canadian Provincial and Municipal Index were 2.52 percent yesterday, compared with 2.36 percent on Dec. 19, the lowest since at least 1992. The provinces are benefiting as government-bond yields trade at almost record lows as the European-debt crisis dents consumer and corporate confidence, driving demand for safety. Moody’s Investors Service lowered its outlook for Ontario to “negative� last month, citing a “softening economic outlook,� while Nova Scotia cut its gross domestic product forecasts for this year and next. “There’s extreme uncertainty as it relates to the outlook not only for Europe but for North America and some specific provincial economies is as well,� Warren Lovely, a government- bond strategist at CIBC, said by phone from Toronto. “There are concerns about the ability of some provinces to successfully tackle deficits and put spending on a sustainable footing. As a result there are some risks to ratings.� The loonie gained 1.2 percent during the past month, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The U.S. dollar was little changed and the euro fell 3.1 percent. To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Q

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