Bloomberg News

Canada’s Dollar Trades Near Three-Week High on Revived Risk Bid

August 30, 2011

Aug. 30 (Bloomberg) -- Canada’s dollar traded within a cent of a three-week high, paring an earlier drop as equities and crude oil climbed on speculation U.S. policy makers will act to buttress the economy if it deteriorates further.

The loonie, as the currency is sometimes known, was still headed for its biggest monthly decrease since May on reduced likelihood the Bank of Canada will boost borrowing costs. Government bonds were headed for their best monthly returns since the depths of the financial crisis in 2008.

“We’re going to follow the path of other asset markets, so you have to have a view on equities,” said Shane Enright, executive director at Canadian Imperial Bank of Commerce’s CIBC World Markets, by phone from Toronto. “If you think we’ve seen the worst for equities, then we’ve probably seen the worst for the Canadian dollar.”

The loonie traded at 97.79 cents per U.S. dollar at 5 p.m. in Toronto, compared with 97.69 yesterday, when it touched 97.41 cents, the strongest level since Aug. 4. One Canadian dollar buys $1.0226. The currency has fallen 2.4 percent this month, which would be the biggest decrease since a 2.4 percent decline in May.

The Standard & Poor’s 500 Index increased 0.2 percent after dropping 1.2 percent earlier today. The S&P/TSX Composite Index gained 1 percent. Futures on crude oil, Canada’s biggest export, climbed 1.8 percent to $88.80 a barrel in New York trading.

A gain in 10-year government bonds pushed the yield down six basis points, or 0.06 percentage point, to 2.40 percent. The price of the 3.25 percent security maturing in June 2021 advanced 51 cents to C$107.35. Government debt has returned 2.3 percent this month, the most since December 2008, according to a Bank of America Merrill Lynch index.

U.S. Confidence

The loonie dropped earlier today after the Conference Board reported that the New York-based research group’s index of consumer confidence for the U.S., Canada’s biggest trading partner, slumped this month to 44.5, the lowest since April 2009, from a revised 59.2 reading in July.

Canada’s current account deficit widened in April through June to the second largest on record, Statistics Canada reported. Payments sent abroad exceeded receipts from outside Canada by C$15.3 billion ($15.7 billion), trailing only the C$17.9 billion in the third quarter of last year. A Bloomberg News economist survey had a C$13.7 billion shortfall as the median estimate.

Canadian economists have cut by half their expectations for Bank of Canada policy rate increases through the end of next year, a Bloomberg survey shows.

Interest-Rate View

The median forecast for the central bank’s 1 percent target rate for overnight loans between commercial banks was reduced to 1.75 percent at the end of next year, according to the monthly Bloomberg News economist survey taken Aug. 22-29.

The target had been projected to increase to 2.50 percent next year in last month’s survey. Reports over the past month showed Canada’s economy weakening even before the impact of financial-market turmoil stemming from Europe’s sovereign-debt crisis and S&P’s downgrade of U.S. debt.

Bank of Canada Governor Mark Carney told lawmakers on Aug. 19 the Canadian economy stalled and may have even contracted in the second quarter.

Canada’s economy was unchanged in the three months through June after expanding 3.9 percent in the first quarter, according to the median forecast of 23 economists in a Bloomberg News survey. The report from Statistics Canada is due tomorrow.

U.S. stocks advanced today after minutes of the Federal Reserve’s meeting this month indicated some policy makers wanted to take more action to stimulate the economy.

Bernanke Outlook

Fed Chairman Ben S. Bernanke said in his Aug. 26 address in Jackson Hole, Wyoming, that the central bank still has tools to boost growth, without specifying what they were or whether they would be deployed.

Last year, the Fed chief used his Jackson Hole speech to lay the groundwork for a second round of bond purchases, also known as quantitative easing.

“It seems that we will have low rates for a while and that if things get worse, some form of QE3 could be coming,” said Firas Askari, head of currency trading in Toronto at Bank of Montreal’s BMO Capital Markets unit, by e-mail. “At the end of the day, its effect will be marginal at best.”

--With assistance from Theophilos Argitis and Ilan Kolet in Ottawa. Editors: Dennis Fitzgerald, Greg Storey

To contact the reporter on this story: Chris Fournier in Halifax, Nova Scotia, at cfournier3@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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