Bloomberg News

Canada Dollar Rises as U.S. Stocks Rebound on European Outlook

October 04, 2011

Oct. 4 (Bloomberg) -- Canada’s dollar rose against its U.S. counterpart as stocks rallied in late afternoon amid speculation European Union officials are examining how to recapitalize the region’s banks.

Equities prices rebounded after the Financial Times quoted Olli Rehn, European commissioner for economic affairs, as saying there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign debt crisis. The loonie, as the currency is nicknamed, weakened earlier on concern the global economy is weakening after Federal Reserve Chairman Ben S. Bernanke said the U.S. central bank stands ready to take additional steps to boost growth.

“There was a bullish close on the U.S. and that helped the loonie,” said Martin Autotte, managing director and head of capital markets for Quebec at CIBC World Markets in Montreal. “Volatility has been very high.”

The Canadian currency rose 0.3 percent to C$1.0513 per U.S. dollar at 5 p.m. in Toronto, from C$1.0547 yesterday. Earlier it fell as much as 1.1 percent to C$1.0658, its lowest level since September 2010.

The Standard & Poor’s 500 Index jumped 2.3 percent by 4 p.m. New York time, while Canada’s benchmark Standard & Poor’s/TSX Composite Index, which fell as much as 3.6 percent earlier, closed down 0.7 percent.

Italy Cut

The Canadian currency briefly gave up gains after Moody’s Investors Service cut Italy’s bond rating cut to A2 from Aa2 by Moody’s Investors Service. The outlook is negative.

“This is more of a cut than the market was considering,” said C.J. Gavsie, managing director for currency trading at Bank of Montreal, by phone from Toronto. “It comes at a time when liquidity in the market is very poor. All the equities have closed and investors are no longer there.”

In a September Bloomberg survey released today, economists cut forecasts for Canadian government bond yields and the policy lending rate on the worsening outlook for the global economy.

Two-year yields will rise from 1.15 percent at the end of the year to 2 percent by the end of 2012, according to the median forecast of 1,031 investors, analysts and traders who are Bloomberg subscribers. In the August survey, the two-year yield was projected to rise to 2.35 percent from 1.20 percent during the same period.

The two-year yield rose five basis points to 0.88 percent today. It dropped to a record low 0.76 percent on Sept. 12.

BOC Rate

The median forecast for the Bank of Canada’s target rate for overnight loans was cut 25 basis points in the second, third and fourth quarters of 2012, bringing it to 1.5 percent by the end of next year, the survey showed. Policy makers have held the rate steady at 1 percent since September 2010.

“We’re pinning a lot of our hopes on the early November period, where we think that there’s a strong chance of a coordinated Group-of-20 action, or Federal Reserve quantitative easing, or some sort of euro-zone package,” Tom Levinson, a currency strategist at ING Groep NV, said by phone today from London. “That’s what’s needed to gain any sort of stability if not improvement in these commodity currencies. If you don’t get that, then it’s a particularly tough outlook.”

The loonie has weakened 2.8 percent in the past three months, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback has gained 7.3 percent, and the yen has gained about 13.8 percent.

--Editors: Paul Cox

To contact the reporter on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net.

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


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