Bloomberg News

Canadian Dollar Approaches Four-Week High on U.S. Factory Gain

September 01, 2011

Sept. 1 (Bloomberg) -- Canada’s dollar traded at almost its strongest level in four weeks after a report showed manufacturing in the U.S., the nation’s biggest trading partner, unexpectedly expanded in August.

The loonie, as the currency is nicknamed, advanced against the majority of its most-traded counterparts, climbing versus the euro and yen before the Bank of Canada’s policy meeting next week. The Canadian dollar is getting a boost because Canada has raw materials to export and its government is committed to balancing its budget, according to Lane Newman, director of foreign exchange at ING Groep NV.

“People are looking for places to park their U.S. dollars where they don’t have to worry about a run on the country,” said Newman, speaking by phone from New York. “In the new paradigm where liquidity is at a premium, at certain times the Canadian dollar benefits.”

The loonie appreciated 0.1 percent to 97.69 cents per U.S. dollar at 5 p.m. in Toronto, from 97.77 cents yesterday, when it touched 97.25, the lowest level for the greenback since Aug. 4. One Canadian dollar buys $1.0237.

The Institute for Supply Management’s U.S. factory index fell less than forecast to 50.6 in August from 50.9 in the previous month, the Tempe, Arizona-based group said today. The median estimate of 80 economists in a Bloomberg News survey was for a drop to 48.5 Figures greater than 50 signal expansion.

“ISM is helping Canada,” said John Curran, a senior vice president at the online currency dealer CanadianForex Ltd., by telephone from Toronto, referring to the Canadian dollar.

Loonie Versus Euro

The Canadian currency gained 0.9 percent to C$1.3930 against the euro after a report showed Europe’s manufacturing contracted in August more than initially estimated, adding to signs that the euro region’s recovery is faltering. The loonie gained 0.4 percent to 78.75 yen.

Investors should bet against the euro by buying the Canadian dollar as political dissent in Germany threatens passage of expanded measures to contain Europe’s sovereign-debt crisis, according to BNP Paribas SA.

“The euro is likely to struggle over the coming weeks,” Rob Ryan, a strategist at BNP Paribas in Singapore, wrote today in a research note. “But if we favor going short euro, we find it difficult to do so against the dollar.” A short is a bet an asset will decline in value.

BNP Paribas favors shorting the euro versus the Canadian dollar at C$1.41 with a target of C$1.36, Ryan wrote. Investors should exit the trade if the euro appreciates to a level higher than C$1.43, according to BNP Paribas.

‘Significant Problems’

“‘Euro still has significant problems in terms of sovereign risk, in terms of growth, in terms of structural separation between the north and the south,” ING’s Newman said.

Government bonds advanced, with the yield on 10-year debt down 10 basis points, or 0.1 percentage point, to 2.39 percent. That’s 26 basis points higher than equivalent-maturity Treasuries, from 27 basis points yesterday, the widest spread since November 2010. The price of the 3.25 percent Canadian security maturing in June 2021 increased 90 cents to C$107.45.

Trading in overnight index swaps show no chance of an increase in the Bank of Canada’s target rate for overnight lending between commercial banks, now at 1 percent, at the December meeting, according to Bloomberg data. The chance of a quarter-point cut by December has increased to 44 percent. On April 30, odds of an increase in rates were more than 90 percent, with no chance of a cut, Bloomberg data show.

Carney on ‘Risks’

Bank of Canada Governor Mark Carney said in Aug. 19 testimony to parliament that “several downside risks” have been realized since his July decision to keep the bank’s main lending rate unchanged, including a deepening of Europe’s sovereign-debt crisis and “the persistent strength of the Canadian dollar.” Policy makers next meet on Sept. 7 to determine rates.

The loonie has averaged about 97.50 cents per U.S. dollar in 2011, compared with C$1.04 from January through August of last year and $1.18 during the period in 2009. A stronger currency crimps exports because it makes goods more expensive in other countries.

Canada’s dollar rallied to a three-year high of 94.07 cents on July 26 before plunging to below parity Aug. 9 on concern the U.S. economy, the primary market for Canada’s energy products, may be heading into another recession.

The loonie dropped 2.3 percent in August on speculation Europe’s sovereign-debt crisis will sap risk demand and concern the global economy is slowing.

--With assistance from John Detrixhe in New York. 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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