The Shape of Market Bubbles (with a Footnote on Gold)

In my weekly updates of major worlds markets, one of the charts includes an overlay of the amazing bubble in the Shanghai Composite Index. In this commentary we'll build an overlay of four major bubbles across market history to see the variety of shapes a bubble can take. But first let's take a long view of the index.

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The next chart centers the Shanghai Composite. The peak is the center of a 3000-market day timeline. Markets are open approximately 250 days per year, so this is a snapshot of a little over eight-and-a-half years with plenty of room left to track the future behavior. The dramatic rise took place over about one year with a dramatic collapse of about the same duration. The symmetry of this these two years is astonishing and, as we'll see, not necessarily characteristic of bubbles.

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Now we'll add the Nasdaq Tech Bubble. The Nasdaq was a bit less aggressive in the early stages of bubble formation, but the collapses are remarkably similar.

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The next chart adds the Dow of the late Roaring Twenties and Crash of 1929. Here we see a more gradual bull market over the first five years with a major acceleration occurring in the 12-13 months prior to the peak. The 1929 Crash took the Dow to the legendary lows that the Nasdaq nearly equaled 70 years later. But the Dow decline lasted a good six months longer before beginning a sustained bear-market rally.

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The Nikkei 225 bubble is one I periodically feature in an overlay with the S&P 500, where it looks amazingly steep as the central pattern of a 40+ year timeframe. But in the context of this series, the Nikkei peak on the last market day of 1989 was far more gradual in both the making and unwinding. The first year of the decline, however, was as savage as the other three.

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Bubbles happen, and they usually go unrecognized by the majority of market participants until the late stages. The left side of the bubble is usually more gradual than the collapse, although the incredible rise of the Shanghai market is a notable exception.

People often use alphabet metaphors for recoveries: V-shaped, W-shaped and L-shaped. It's too soon to characterize the Shanghai Index, but the others most closely resemble an "L" over the timeframe of these charts.

Footnote: Is Gold a Bubble?

It doesn't appear to be. While the rise somewhat resembles the Nikkei leading up to the 1989 peak, Gold doesn't come anywhere close to the bubble shape of the Nasdaq and Shanghai examples we've reviewed.

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Is Gold cheap? No. Can it continue higher from here? Theoretically, yes. In reality, only time will tell.

Silver (SLV) – Candle Patterns And Another 45% Drop Prediction

For the past month or so, there has been a decidedly bearish trend for silver. Not only did the CME jump-start the process when they raised the margin and initial balance requirements last month, but even with the recent weakness in the U.S. dollar, silver isn’t being bought with any conviction.

Of course this is all about trading the position and may not apply for longer time frame – if you are willing to buy and hold for a months or years, for example.

Before studying the charts below, it is important to note that over the weekend,

Mark Arbeter of Standard & Poors was out with some analysis and comments about gold and silver.

“While we think gold has an outside chance to make new highs, we believe prices could fall to the $1,250 to $1,300/oz. region in the months ahead. Silver is in much worse shape, by our analysis, and is breaking down out of a bearish wedge. We think silver could fall all the way to the $20/oz. area before this correction is finished.”

(Simple math: $20 for silver is a 45% drop from here. Keep that in mind when looking at the chart setups below)

Credit Agricole was also sharing their bearish view:

Meanwhile, silver has pulled back in line with weaker industrial metals, with prices hovering around key support located at the 100-day moving average at $35.73, the bank says. “A move below this key level could prompt further liquidation and selling, which could see the market trading at the recent lows at $32/oz, but technically is still within a correction.”

CommerzBank recently provided an update and outlook:

“…the potential right now is that we see one step forward and two steps back in silver and I think it can continue,” said Commerzbank analyst Eugen Weinberg. “The real problem is the price increase before was overdone and the market was overheated… speculative investors have not yet exited (their positions),” he said, adding: “This is a situation where the tail is wagging the dog.”

McCllean’s Chart in Focus this week summed it up:

…Looking ahead, if the current silver market keeps following the pattern made by silver prices in 1980, then we should look for a resumption of the decline starting in late June.

International Business Times had some Fibonacci levels to watch:

Once more, silver touched 38.2% seen on the image around 38.90 and couldn’t breach it. Bearish signs started to appear on momentum indicators which may bring more bearish pressure. Hence, the suggested Elliott count which has two probabilities for the wave from bottom of $32.30 reinforces the bearish direction. The general trend over short term basis is to the downside,targeting $26.65 as far as areas of 48.50 remain intact with weekly closing.

The chart below shows a different set of indicators than we have used in our previous analyses. This time, Japanese candlesticks were added to a daily chart. Of late, these have been an accurate predictor of the future direction for this commodity. In addition, the trend study (think of a parabolic study) accurately provided an alert of when the time was to get out for longs and is nowhere close to indicating moving back into a long position.

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How about the positioning and outlook of the non-commercial “pro” investors? The Commitment of Traders report from this week shows that there has been a continuation of long positions unwinding. At the same time, there has been a similar/equal covering of short positions. What that means is that on the way down, while the long holders have been selling in order to lock in “any” profits they may have, shorts have been covering. There was also a significant increase in the short holdings reported (and decrease of the net spread) this week.

The spread of shorts-to-longs has been increasing and now is at it highest point since the price top in April. Shorts are starting to gather conviction as silver has been unable rally and hold for more than a couple of days. That should put additional pressure on the price as long holders are still reducing positions.

There is one word of warning that should be mentioned here: We constructed a ratio of Short/Long holdings from the Commitment of Traders Report which shows that the ratio is getting a bit crowded on the short side. Historically, these kinds of spikes have been associated with key tops and bottoms. The chart below shows a history of the ratio of net short positions to longs, overlaid with the price of silver. As the orange line moves higher, the short ratio is increasing and visa-versa.

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Right now there is an unusually high ratio of short interest. That may be a signal worth noting. Add to that the technical backdrop as the 100 DMA has been solidly defended and there is a potential short squeeze which may imminent. Even if that does occur, it may be considered a rally worth fading.

Strategy: If there is a quick rally off of the 100 DMA, watch for overhead resistance at the next Fibonacci level of $37.67. A break above that will bring the 50 DMA into play at $39.43.

At that point, the best entry will be to consider initiating a long position on a clean move (and hold) above $40.25.

Until that level is breached, rallies are meant for adding/initiating short positions.

Federal Reserve Admits: We Have No Gold !

Fed's attorney Scott Alvarez boldly admits that the Federal Reserve has no Gold whatsoever backing the US Dollar : "The Federal Reserve does not own any gold at all" he literally said , "we have not owned gold since 1934 so we have not engaged in any gold swaps " ... If Ron Paul doesn't get elected, America will go to Hell,literally The corporation, posing as a government, THE UNITED STATES, INC, has committed treason against the People of this nation. They have no true authority over the People of this country.Their power only resides in Washington, D.C. They are more evil than most of mankind can even fathom. Yet, they control our military and our police.This nation is literally screwed if they do not wake our military and law enforcement up to who it is they are here to defend!Federal reserve does not own any gold at all

f everyone pulled there money out of banks, investments and stocks..they would collapse these crooks. Then I wanna see what they do, they won't have anyone to rip anyone off anymore. I blame the people for this because they enable these crooks to do what they do.

Petronas Chief: Oil Should Fall to $75-$80 Range

The chief of Malaysia's national oil company Petronas said Monday that global oil prices are too high and should fall back to between $75 and $80 a barrel.

While demand has surged, Petronas Chief Executive Shamsul Azhar Abbas said there was no real evidence of an oil shortage and that current prices above $100 a barrel appeared largely linked to speculation in crude markets.

"Given the current state of market fundamentals and the cost environment, I believe prices should remain within the range of $75 to $80 per barrel," Shamsul told a two-day Asian oil and gas conference.

Oil prices soared from about $70 a barrel last summer to as high as $115 this spring, and currently are hovering above $100. They were driven up by turmoil in the Middle East and North Africa, rising demand in developing countries and a weakening U.S. dollar.

The 12-member Organization of Petroleum Exporting Countries, which accounts for about 40 percent of the global crude supply, will discuss Wednesday whether to boost production to help lower prices.

Shamsul said a major long-term challenge would be to meet growing oil demand amid dwindling resources, and that companies would be relying on smaller fields and offshore fields to sustain production.

Meanwhile, Asia's oil demand has been projected to increase by two-thirds within the next 20 years. At this rate, Asia will have consumed more than 250 billion barrels of oil by then -- more than six times its current reserves of about 40 billion barrels, he said.

"There is truly no mistaking that Asia's dependence on energy imports and investments into other resource-rice regions will grow," he said.

Tech Cheapest Since 1998 Amid IPO Bubble Fear

The five-week drop in U.S. stocks has driven technology company valuations to the lowest level in more than a decade, making them too cheap to pass up for some of the nation’s biggest money managers.

The largest group in the benchmark gauge for American equities lost 7 percent through June 3, or about $190 billion in value, since the market peaked on Feb. 18, falling more than any industry outside financials. Computer stocks trade for 9.3 times reported earnings before interest, taxes, depreciation and amortization, 1.3 times the index’s multiple, data compiled by Bloomberg show as of June 3. The ratio is the smallest since at least 1998.

While signs of a slowing recovery and the initial public offering of LinkedIn Corp. have spurred concern the industry has entered a speculative bubble, the numbers show something different. Profits will rise 35 percent faster than the Standard & Poor’s 500 Index in 2011, and executives are boosting computer and software spending, data from Bank of America Corp. and Bloomberg show.

“We see the best supply-demand trend in technology,” said Michael Sansoterra, a money manager at RidgeWorth Capital Management in Atlanta, which oversees $48.5 billion including Broadcom Corp. (BRCM) and Google Inc. (GOOG) shares. “You can measure it pretty much every way you want and it looks attractive.”

Computer-Industry Earnings

Computer-industry earnings are almost double the level at the peak of the Internet bubble. Profits for technology makers in the S&P 500totaled $135.6 billion last year, compared with $72.9 billion in 2000, when the S&P 500 Information Technology Index reached an all-time high, according to data compiled by Bloomberg. Bank of America says corporate expenditures on equipment and software will increase 10 percent this year, about four times faster than U.S. gross domestic product.

Per-share earnings at computer and software makers will climb 24 percent in 2011, outpacing the 17 percent increase for the S&P 500, according to projections from analysts surveyed by Bloomberg. Based on those estimates, technology companies trade for 12.8 times profit, compared with 13.1 for the S&P 500, data compiled by Bloomberg show.

U.S. stocks fell last week, the fifth straight decline, after the government said employers added 54,000 jobs in May, making it the worst report in eight months, and manufacturing trailed economists’ estimates. The S&P 500 slipped 2.3 percent to 1,300.16 as a group of computer and software makers including Redmond, Washington-based Microsoft Corp. (MSFT) and Hewlett-Packard Co. (HPQ) in Palo Alto, California, lost 1.9 percent, widening the decline since Feb. 17 to 7 percent.

The benchmark index for U.S. stocks retreated 1.1 percent to 1,286.17 at 4 p.m. in New York today, the lowest level since March 18.

Biggest Retreats

The retreat was exceeded only by financial companies, which has dropped 11 percent since Feb. 18. Technology stocks’ price- to-Ebitda ratio of 9.3 compares with an average of 14.5 times since 1992 and is 76 percent below the record 38.3 multiple reached on March 27, 2000, data compiled by Bloomberg show.

Economic growth slipped to a 1.8 percent annual rate in the first three months of this year from 3.1 percent in the fourth quarter, according to the U.S. Commerce Department. Technology shares rose 54 percent during the last nine months of 2009, trailing only financial stocks, as gross domestic product posted its biggest two-quarter expansion in six years.

LinkedIn Debut

LinkedIn in Mountain View, California, the first major U.S. social-media company to go public, surged 109 percent on its May 19 debut and traded as high as 31 times annual sales. The rally was a day before Harvard University Professor Lawrence Summers, the former U.S. Treasury secretary, said there’s concern technology stocks are in a bubble.

Groupon Inc., the largest provider of online coupons, filed with the U.S. Securities and Exchange Commission on June 2 to raise $750 million. The Chicago-based company discussed an IPO with underwriters in March that would have valued it at as much as $25 billion, or 9.7 times sales, people familiar with the matter said at the time.

The S&P 500 Information Technology Index trades for 2.4 times sales, data compiled by Bloomberg show. That compares with the average of 2.6 since 1992.

“I’m actually looking at this area, particularly with the selloff, to see if there might be some stocks that we can add,” said John Carey, a Boston-based money manager at Pioneer Investments, which oversees about $250 billion including Microsoft. “It’s out of favor. And yet technology is still a growing part of the world economy.”

Biggs Favorite

Hedge-fund managers have added computer stocks since Traxis Partners LP’s Barton Biggs said they were among his favorite investments at the start of 2010. Paulson & Co., the New York- based firm run by billionaire John Paulson, disclosed a $1 billion stake in Hewlett-Packard in a May 16 filing. David Einhorn’s Greenlight Capital Inc. told clients in April that it bought shares of Sunnyvale, California-based Yahoo! Inc.

Hewlett-Packard fell nine straight days through May 23, the longest streak since at least 1980, as the biggest personal- computer maker cut its full-year sales forecast. Yahoo dropped 6.5 percent in May as speculation grew it may benefit less from part ownership of China’s largest e-commerce provider amid tension with Alibaba Group Holding Ltd.

Greenlight also added 1.39 million shares of Microsoft last quarter, according to a filing with the SEC. The biggest software maker has slumped 14 percent this year after lagging behind the S&P 500 in four out of the previous five quarters. It trades at 9.7 times reported earnings, down from its peak multiple of 81 in 1999. The 34 percent discount to the S&P 500 is the widest since at least 1992, Bloomberg data show.

Microsoft Discount

Low valuations may not be enough to drive above-average gains. Since Oct. 9, 2002, the end of the bear market that followed the collapse of technology shares in 2000, Microsoft’s price-earnings ratio has averaged 18.6, compared with 23.9 for technology stocks in the S&P 500. Over the period, Microsoft has returned 53 percent including dividends, versus 131 percent for the industry, data compiled by Bloomberg show.

“The biggest statistical bargains tend to be the most controversial,” said Howard Ward, a money manager at Mario Gabelli’s Gamco Investors Inc., which oversees $35 billion in Rye, New York. “So far, momentum investors have not taken the bait. They are waiting for more evidence of a turn in the cycle. It will come, but timing the inflection point is murder.” His firm owns Mountain View, California-based Google and Qualcomm Inc. in San Diego.

Recovery Concern

Investors tend to move money from one sector to another in anticipation that some industries may profit more in a certain stage of an economic cycle. Technology companies trailed the market this year after posting the third-worst performance in 2010. The stocks have suffered in a rotation into companies whose earnings are least-tied to economic growth amid concern the U.S. recovery is slowing.

The shift has pushed the size of stock swings for computer and software makers to an almost-three-year peak. The S&P 500 Information Technology Index’s 90-day volatility relative to the S&P 500 rose to 1.23 on April 25, matching the level on April 14, 2010, which was the highest since July 29, 2008, less than two months before Lehman Brothers Holdings Inc.’s bankruptcy, Bloomberg data show.

Microsoft is worth owning because of the income it generates, said Channing Smith, a money manager at Capital Advisors in Tulsa, Oklahoma. The stock offers a dividend yield of 2.68 percent, compared with the S&P 500’s payout ratio of 1.92 percent, data compiled by Bloomberg show.

‘Income Play’

“It’s a very good income play,” said Smith, whose firm manages over $900 million. The company had $50.2 billion in cash and short-term investments on March 31, compared with $11.9 billion in long-term debt, according to a government filing. “Their balance sheet is unbelievable,” Smith said.

While the pace of hiring in the U.S. is slowing, American companies may spend more on automation to cut costs, said Smith of Capital Advisors. U.S. productivity, or employee output per hour, rose 3.9 percent last year, the most since 2002, according to Labor Department statistics released in March. Worker costs fell 1.5 percent following a 1.6 percent decrease in 2009, the first back-to-back drop since 1962 and 1963.

Corporate spending on equipment and software will increase 10 percent this year, compared with U.S. gross domestic product growth of 2.5 percent, according to Bank of America inCharlotte, North Carolina. Technology companies derive 60 percent of their sales from business spending, the highest portion among S&P 500 industries, the firm estimates.

“We are fans of the capital-goods sector,” said John Kattar, chief investment officer at Eastern Investment Advisors in Boston, which manages $1.7 billion. “Technology continues to get cheaper. It will outperform because of the recovery in capital spending.”

U.S. Hyperinflation is Coming Soon...

Current developments in the United States and globally make hyperinflation almost a certainty, but you can protect yourself from it and even profit.

$1,500 Gold and $30 Silver are just harbingers of things to come and should the US suffer hyperinflation these numbers could triple.

I have written "U.S. Hyperinflation Is Coming Soon," a 24-page, 13,000 word analysis of economic, historic and social factors and suggested plan of action for investors. In it, I conclude that if your assets are stored primarily in U.S. Dollars, you need to act now to protect your family, wealth and future.

In April 2004 I wrote “The Perfect Golden Storm,” which described the forces driving gold toward and beyond its 1980 peak of $850. In April 2008, with gold already having reached $1,000, I wrote “Gold: $2011 by 2011,” which predicted that the bull market in gold would continue. By April 2011 gold had reached $1,500.

The current gold bull market is still in Phase I. Phase I involves gradual increases in the price of gold; Phase II, steeper increases; Phase III, a near vertical increase, followed by a sharp fall.

In Phase I of the 1977-1980 gold bull market, the price increased 25.8% the first year, 33.6% the second year, and 22.8% in the next six months (45.6% annualized). In Phase II, the price went up 84.5% in the next six months (169% annualized). Phase III lasted 20 days, during which the price spiked 66% (1,204% annualized)>

The current bull market, which has already lasted 10 years, is still in Phase I, with average annual increases of 20.3%.

In Phase II we are likely to see 50% annual increases over a period of about two years, taking gold to around $3,000. The complete Hyperinflation study explains Phase III, which would have gold reaching $5,000 or more with three or four months. I believe Phase III will occur by 2014. A US government decision to adopt a gold standard or start a gold confiscation program would accelerate this timetable.

The 1977-1980 gold bull market ended without hyperinflation. Very high interest rates and wage and price freezes sent the country into a recession and gold into a bear market. The U.S. is in a different place today, facing stiffer global competition and higher federal deficits and national debt, and committed to stimulating the economy through low interest rates.

During the 20th Century, 30 countries experienced hyperinflation. In every case, horrifying price increases that quickly wiped out the value of savings and of most forms of investment took people by surprise.

Economist Phillip Cagan famously defined hyperinflation as an average monthly price increase of 50% or more. At that rate, a $10 item costs $1,946 one year later. Most of the 30 nations that suffered from hyperinflation in the 20th Century followed the Cagan model.

Many of the factors that have led to hyperinflation in the past are present in the United States today. They include fiat currency, financing wars through debt, government bailouts of financial institutions, rapid increase in national debt, increased creation of money, and monetizing of national the debt (through Fed purchases of Treasury notes), wage freezes, and social turmoil.

U.S. federal debt is going up, with no end in sight. Standard & Poor’s changed its outlook rating on US sovereign debt from “Stable” to “Negative.” Bill Gross’s PIMCO Total Return Fund sold all the T-Bills in the fund. State and municipal budget deficits compound the problem, as do growing trade deficits.

The federal government claims inflation is running at about 2%. If the CPI were still calculated as it was in 1980, inflation would be running at just under 10%. The index of all commodity prices is up 230% in 10 years. The US Dollar Index is calculated against a basket of six other fiat currencies that have lost purchasing power. Nevertheless, from a high of 160, the USD has recently tracked in the 72-74 area. Governments that are in denial about inflation continue to feed inflation until it grows into hyperinflation.

In November 2010, President Obama froze the wages of 2.1 civilian federal employees for two years. Many states and municipalities are following suit. Tens of thousands of workers and students demonstrated in Madison, WI and even briefly occupied the State House to protest the termination of collective bargaining rights. Similar protests have taken place in Montana, Illinois, and Indiana. In California, New York, and other states, thousands of college students, faculty, and employees have demonstrated against cuts to education budgets.

Social unrest makes governments leery of taking economic measures, such as raising interest rates and tightening up on credit that might create more unemployment and generate more protests. Often, it drives them toward papering over the problems with money, bringing on hyperinflation and even more social unrest.

My study covers the history and possibility of US. Government Confiscating Gold or what is happening right now that could lead our country to creating a Gold Standard, and backing our currency with Gold.

By Barry Stuppler

Market Weakness Will Create Buying Opportunity, But When?: ABC, CNIT, EXEL, GPRO, HOG

The market continued its losing ways, as stocks extended their losses late in the day. We've been saying that we were expecting the market to be weak this summer, and thus far that is playing out as the economic data has been lackluster. However, at this point we still think this is a small pause, and we're continuing to look for a fall rally. As such, we think it could be a good time to start accumulating shares of favorite stocks later this summer. However, we're expecting more downside in the near term first.

The Drug Distributor Stocks Index was the top performing tickerspy Index on the day, led by AmerisourceBergen (NYSE:ABC - News) with a 0% gain. The Chinese IT Stocks Index was the day's worst performing tickerspy Index, with China Information Technology (Nasdaq: CNIT - News) down -15%.

Stocks fell on the day, with the Dow off -61 points to 12,090. The S&P dropped -14 points to 1,286, while the Nasdaq tumbled -30 points to 2,703. Oil slipped -$1.21 to $99.01 a barrel, while gold rose $4.80 to $1,547.20 an ounce.

In stock-specific news, shares of biotech firm Exelixis (Nasdaq: EXEL - News) plunged -20.2% after the company reported trial data over the weekend that indicated its experimental cancer drug cabozantinib caused six patient deaths in clinical trials. The deaths represented 1% of the treated group. Cabozantinib is an oral drug that limits blood supply to tumors and blocks two segments of a pathway used by cancer cells to grow and spread.

Shares of medical diagnostics maker Gen-Probe (Nasdaq: GPRO - News) slid -12.7% after The Wall Street Journal reported that Novartis (NYSE: NVS - News) might be the only company remaining that is interested in acquiring it. Gen-Probe shares had risen sharply after the company put itself up for sale, and partner Novartis was believed to want to keep the company out of the hands of competitors. With no other bidders, however, Novartis' interest might wane. Six pros counted Gen-Probe among their top holdings at the end of Q1 and nearly 50 tickerspy members own the stock in their portfolios.

Shares of motorcycle maker Harley Davidson (NYSE: HOG - News) jumped 2.8% after UBS said May sales for the Wisconsin-based company rose 10% on a year-over-year basis, and that it expects double-digit sales growth in June as well. The firm's analysts gave the stock a short-term "buy" rating and a $39 price target, but maintained a longer-term "neutral" rating on the stock. Eleven pros counted Harley Davidson among their top holdings at the end of Q1 and nearly 340 tickerspy members own the stock in their portfolios.

Canadian Dollar Falls a 2nd Day, Trading Near 2-Month Low on U.S. Outlook

The Canadian dollar traded near a two-month low versus the greenback after weaker-than-forecast data last week on U.S. jobs and manufacturing spurred concern the recovery of Canada’s biggest trade partner is faltering.

The loonie, as the currency is nicknamed for the image of the aquatic bird on the C$1 coin, declined as a report showed Canadian building permits fell in April at the fastest pace in more than five years. Crude oil, Canada’s biggest export, and stocks dropped as investors sought safer assets.

“We’ll be seeing not a great deal of action until we have some more data coming out later in the week,” said Darren Richardson, senior corporate dealer in Toronto at CanadianForex Ltd., an online foreign-exchange dealer. “The negative data in the U.S. employment figures and also some weak data in Canada show things are slowing. Both economies are seeing people moving away from high-yield, high-risk currencies.”

Canada’s currency fell for a second day, weakening 0.3 percent to 98.09 cents per U.S. dollar at 5 p.m. in Toronto. It closed at 97.78 cents on June 3, when it touched 98.52 cents, the weakest level since March 21. Earlier today it reached 98.17 cents. One Canadian dollar buys $1.0195.

Building permits dropped 21.1 percent in April to a seasonally adjusted C$5.35 billion ($5.45 billion), Statistics Canada said today. Crude oil for July delivery tumbled 1.4 percent to $98.79 a barrel in New York after slipping 0.4 percent last week, and the Standard & Poor’s 500 Index retreated 1.1 percent.

Fell Versus Peers

The loonie weakened over the past month versus all of its 16 most-traded counterparts, declining 1.4 percent against the U.S. dollar and 1.7 percent against the euro. It dropped the most today against the yen, losing 0.6 percent.

The euro touched a 15-month high today versus the loonie after European Union and International Monetary Fund officials agreed last week to pay the next installment to debt-strapped Greece under last year’s 110 billion-euro ($161 billion) bailout.

“We’ve seen a lot of trading activity in euro-Canada, and that’s going to continue as there’s a lot of unknowns with respect to the European debt situation,” said Blake Jespersen, director of foreign exchange at Bank of Montreal in Toronto.

The Canadian dollar fell as much as 0.4 percent to C$1.4371 per euro, its weakest level since March 2010, before trading at C$1.4299, up 0.1 percent.

Ivey Index

The currency pared losses after the Ivey purchasing managers index increased more than projected in May, rising to 65.5 on a seasonally adjusted basis, according to a statement on the University of Western Ontario business school’s website. The adjusted reading in April was 57.8, and the median estimate in a Bloomberg News survey was 55.2. Readings of more than 50 signal purchasing by governments and companies advanced.

“This morning’s Ivey PMI report suggests that the recovery in Canada could be gaining momentum,” Kathy Lien, director of foreign-exchange research at online currency trader GFT Forex in New York, wrote to clients today. “The Canadian dollar appreciated very modestly after the release because worries remain about how the Canadian economy would perform in the face of slower U.S. growth.”

Finance Minister Jim Flaherty, whose Conservative Party won a majority in last month’s election, committed in today’s 2011 budget to erase the country’s deficit during the government’s mandate while fulfilling campaign promises.

Flaherty said he’ll seek to bring the federal government back into surplus by 2014 by implementing a review of government operating costs that will save up to C$4 billion annually. His budget document released today, which doesn’t account for any of the operating savings, projects a return to balance in 2015.

Bonds Fall

Canada’s government bonds pared losses. The yield on the 10-year note rose less than one basis point to 2.99 percent, after increasing earlier to 3.03 percent. It fell to 2.95 percent on June 3, the lowest since November. One basis point is 0.01 percentage point. The price of the 3.25 percent security due in June 2021 decreased 3 cents to C$102.22.

The government will sell C$1.4 billion of 30-year bonds on June 8, according to a statement on the Bank of Canada’s website. The securities mature in December 2045.

The loonie fell 2.4 percent in May versus the U.S. dollar, the first monthly drop since January and the biggest since August, amid concern a weak U.S. recovery will prompt the central bank to delay interest-rate boosts. The Bank of Canada has held its key interest rate at 1 percent since September, after raising it last year from a record low 0.25 percent.

U.S. payrolls increased by 54,000 jobs in May, less than a third of the 165,000 that economists had projected, Labor Department data showed last week. An Institute for Supply Management report on June 1 showed manufacturing in the nation grew at the slowest pace in more than a year.

‘Softens for Canada’

“As the outlook softens for the U.S., it also softens for Canada,” said Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital unit in Toronto.

Canada ships about 75 percent of its exports to the U.S.

Employment growth in Canada slowed in May, a Statistics Canada report may show on June 10. Employers added a net 20,000 jobs after a gain of 58,300 in April, according to the median estimate in a Bloomberg survey.

“The market’s now looking to later in the week in Canada when we see our employment number,” Bank of Montreal’s Jespersen said. “The market is going to be positioning itself somewhat defensively heading into that number.”