Oct. 12 (Bloomberg) -- Canada’s dollar gained the most in more than two months versus its U.S. counterpart as optimism that European officials will agree a plan to recapitalize the region’s banks sparked advances in higher-yielding assets.
The currency strengthened along with commodity-linked peers the Australian and New Zealand dollars as crude oil futures topped $86 a barrel and stock markets in Europe and North America rose. The greenback and yen were among the worst performing of the 16 most-traded currencies against the Canadian dollar.
“The Canadian dollar is really a risk trade, and the fact we had a really nice improvement in risk appetite has proven to be a huge boost,” said Kathy Lien, director of currency research at online trading firm GFT Forex in New York. “We also had some good housing market data. People are looking at this and at the increasing likelihood of a larger bailout plan for Europe, and all of that is helping the Canadian dollar.”
The Canadian currency advanced 1.2 percent to C$1.0172 per U.S. dollar at 5 p.m. in Toronto, the biggest increase since Aug. 9. One Canadian dollar buys 98.31 U.S. cents.
The Standard & Poor’s 500 Index gained 1 percent in New York as benchmark gauges in France, Germany and Italy surged more than 2 percent. Canada’s benchmark Standard & Poor’s/TSX Composite Index climbed 1.3 percent.
Government bonds dropped, pushing the 10-year yield higher by six basis points, or 0.06 percentage point, to 2.35 percent, the sixth straight increase. Ten-year yields reached a record low 1.994 percent on Oct. 4. They trade at 14 basis points above U.S. 10-year yields, compared with 31 basis points on Oct. 3.
Canada auctioned C$3.5 billion ($3.45 billion) of five-year notes today, drawing an average yield of 1.729 percent. The government received bids of C$8.1 billion for the 1.5 percent notes due in March 2017, according to a statement from the central bank.
The nation’s budget deficit was C$33.4 billion in the year that ended March 31, the finance department’s annual report said. The figure was C$2.8 billion less than Finance Minister Jim Flaherty predicted in a June budget, the report said. That was because revenue was higher than expected while spending was lower.
Flaherty said he may increase stimulus if the global recovery falters.
“We will continue to carefully monitor the economy and will remain flexible and pragmatic in responding to any material deterioration in global economic conditions,” Flaherty said in a summary of the annual report posted on the department’s website. “We are exercising fiscal responsibility and we are urging other countries around the world to demonstrate the same discipline.”
Canada’s new-home price index rose for a fifth month in August led by a gain in Toronto, the government statistics agency said. The index advanced 0.1 percent matching the July increase, Statistics Canada said today in Ottawa. The August increase was also the same as the median estimate in a Bloomberg survey with 14 responses.
Canada’s currency will weaken to C$1.02 versus the U.S. dollar by year-end before rebounding to 98 cents by the end of 2012, according to the median forecast of 35 economists and analysts compiled by Bloomberg. The median forecast from a month ago was for the loonie to end 2011 at 98 cents per U.S. dollar.
The loonie has declined 0.4 percent in the past week, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback is down 2.5 percent, while the yen has lost 3.2 percent.
The euro rose as European Commission President Jose Barroso unveiled proposals on coordinating bank recapitalizations across the European Union. EU and International Monetary Fund officials indicated yesterday that Greece will get an 8 billion-euro ($11 billion) loan next month. Germany and France pledged to draw up a plan by early November.
“There’ve been a lot of comments from European officials promising to increase the EFSF, and just maintaining their commitment to these bailouts,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal, referring to the European Financial Stability Facility. “That was seen as very positive news.”
--With assistance from Greg Quinn in Ottawa. Editors: Paul Cox, Dave Liedtka
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