Foreign investors dumped Canadian bonds in July, helping to kill some of the dollar’s momentum.

Foreign investors reduced their holdings of Canadian securities by $2.6 billion in July, according to Statistics Canada. This was the second such reduction in 2003.

Foreign investors dumped $4 billion in bonds, led by a $6.5 billion selloff of government bonds. They also sold $500 million in money market securities.

However, they bought $1.9 billion in Canadian stocks — the largest acquisition of Canadian equities in 13 months.

“A large part of the selloff was in Canadian dollar-denominated bonds as July marked the end of the loonie’s extraordinary surge against the US$ and a plunge in Canada/U.S. spreads,” BMO Nesbitt Burns says. “As well, the nascent economic recovery sent investors scrambling out of government securities.”

“The loss of favour for Canadian bonds coincided with a 55-basis point reduction in the long-term interest rate spread between Canada and the U.S., and a global asset shift out of bonds into stocks,” CIBC World Markets says.

CIBC says that the buying of Canadian stocks “were primarily by American investors and concentrated in financial sector equities. The net purchase lifted year-to-date purchases to $4.2 billion contrasting with the net disposition over the same period last year.”

“With 20-20 hindsight, it is easy to see why the Canadian dollar got whacked in July,” CIBC says. “As a $5.5 billion portfolio outflow hit the currency.”

Contributing to the outflow was the $3 billion that Canadian spent on foreign securities, the largest investment in eight months. The bulk of spending went to bonds.

“So far this year, Canadians have purchased foreign debt to the tune of $8.4 billion, which is more than any single year on record, and is the second highest seven-month total,” Nesbitt says. “Foreign stock markets attracted just under $0.8 billion, but so far this year, Canadians have been net sellers of global equities. The net selling of foreign equities by Canadian investors likely played as big a role in the loonie’s surge in the first half of the year as foreign investment in Canada did.”

Year-to-date, foreign investment totals $16 billion, a larger inflow than over the same period in the two prior years, Nesbitt reports.

“With Canadian-U.S. spreads a lot leaner than they were earlier this year, we expect a continuation of more tepid portfolio inflows in the coming months,” CIBC says. “The Canadian dollar’s more recent improvement may be indicative of further foreign inflows into equities as optimism in stock markets continues.”