Bloomberg News

Canada Dollar Gains Most in 3 Months on Europe Rescue Optimism

October 15, 2011

Oct. 15 (Bloomberg) -- Canada’s dollar strengthened by the most since July as speculation European officials are making progress fashioning a rescue plan for the region’s debt crisis stoked appetite for riskier assets.

The currency advanced 2.9 percent this week versus its U.S. counterpart, the second straight gain, as stocks climbed and crude oil topped $87 a barrel. A report yesterday showed September U.S. retail sales exceeded forecasts in September. Economists project Statistics Canada data will show Oct. 21 that inflation slowed last month.

“The combination of better U.S. data and hope for Europe have helped soothe markets and drive risk aversion lower,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, in an e-mail yesterday. Technical indicators and lower readings on a volatility index suggest “the Canadian dollar should hang onto the gains it’s made over the last five sessions,” she said.

The Canadian dollar, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, closed yesterday at C$1.0098 per U.S. dollar in Toronto, recording the largest gain since the five days through July 1. It touched C$1.0097, the strongest since Sept. 22. One Canadian dollar buys 99.03 U.S. cents.

September Loss

The currency lost 6.9 percent in September, the most in almost three years, as volatility surged on speculation European officials will fail to contain the region’s debt crisis. The Reuters/Jefferies CRB Index of raw materials climbed 4.5 percent this week, the most since December, as Group of 20 finance ministers began a two-day meeting yesterday to discuss plans to tackle Europe’s debt crisis.

The loonie performed eighth-best among the U.S. dollar’s 16 most-traded counterparts this week, lagging behind the currencies of Australian, Norway and New Zealand, which also rely on raw-material exports to underpin their economies.

November futures on crude oil hit $87.42 a barrel and ended the week up 5.3 percent at $87.28 a barrel in New York. The Standard & Poor’s 500 Index rose 6 percent this week after tumbling 14 percent from July through September, the biggest loss since the last quarter of 2008.

Volatility in the greenback versus the Canadian dollar reached a two-week low. One-month implied volatility on the currency pair touched 12 percent yesterday, the lowest level since Sept. 22. It climbed as high as 16 percent on Oct. 4. The average during the past five years is 11.6 percent.

Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

Europe Plan

European leaders may complete the rescue plan at an Oct. 23 summit to present to a meeting of G-20 leaders on Nov. 3-4. The aim is to put together what the French and German governments call a “durable” fix to the turmoil that has propelled Greece to the edge of default and is roiling global markets.

G-20 and International Monetary Fund officials said the ministers meeting in Paris until today are working on a European rescue plan including boosting the IMF’s lending resources.

“We could continue to see some residual Canadian dollar strength here in the next week or two,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second-largest bank, in a telephone interview. “It remains to be seen what happens on Monday after the G-20.”

Canada’s government bonds fell, pushing the 10-year note’s yield higher by 16 basis points, or 0.16 percentage point, to 2.40 percent. The yields touched a record low 1.994 percent on Oct. 4. The price of the 3.25 percent security maturing in June 2021 dropped C$1.46 this week to C$107.26.

Bond Returns

Canada’s government bonds have lost 1.2 percent this month, the most since November, trimming gains this year to 6.5 percent, according to a Bank of America Merrill Lynch index.

Consumer prices rose 3.1 percent last month from a year earlier, according to the median of 24 economist forecasts compiled by Bloomberg. Statistics Canada is due to release the data on Oct. 21 at 7 a.m.

Canada will sell C$3.5 billion of two-year bonds on Oct. 19, according to the central bank’s website. The previous auction of two-year bonds, on Sept. 14, fetched an average yield of 1.03 percent and a bid-to-coverage ratio of 2.53 times, Bank of Canada data show.

The nation’s factory sales rose 1.4 percent on a seasonally adjusted basis to C$47.6 billion in August, the highest level since October 2008, Statistics Canada said yesterday in Ottawa. The increase exceeded all 21 estimates in a Bloomberg survey of economists that had a median estimate of a 0.5 percent gain.

U.S. retail sales gained 1.1 percent in September, the biggest advance since February, and followed a 0.3 percent gain for August, Commerce Department figures showed yesterday in Washington. The median forecast of 85 economists surveyed by Bloomberg News called for a 0.7 percent rise.

The loonie has dropped 4.1 percent this year, the worst performance in a gauge of 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The greenback is down 2.8 percent. The yen is up 2.7 percent.

--Editors: Paul Cox, 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: Robert Burgess at bburgess@bloomberg.net


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