Canada Dollar Strengthens on U.S. Economy, European Debt Plans
October 18, 2011, 5:39 PM EDTBy Chris Fournier
Oct. 18 (Bloomberg) -- Canada’s dollar strengthened against the greenback on eased concern its largest trading partner may be heading into recession after a report showed U.S. wholesale prices rose in September more than forecast.
The Canadian currency rose versus all of its 16 most-traded counterparts as stocks and crude oil, Canada’s largest export, climbed. The currency extended gains after the Guardian newspaper said France and Germany have agreed to boost the European rescue fund to 2 trillion euros ($2.8 trillion). The two countries are still working on the bailout plan, said a person with direct knowledge of the talks.
“It’s in the ballpark of what they need to convince the markets they are serious, but they’ll have to have leverage to get there and the appetite for leverage has been lukewarm,” said Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc., a unit of Canada’s second largest bank, by e- mail, referring to the European talks.
Canada’s currency climbed 0.9 percent at C$1.0141 per U.S. dollar at 5 p.m. in Toronto, after declining 1.4 percent yesterday. One Canadian dollar buys 98.61 U.S. cents.
TD kept its Canadian dollar forecast at C$1.04 by year-end and was cut to C$1.09 from parity for the first quarter of next year.
Dollar Demand
Some investors have taken the view that recent losses in the Canadian dollar versus the greenback are unsustainable, prompting them to “buy the Canadian dollar at about the C$1.0250 level,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal, by e-mail. “We favor being long the U.S. dollar for a move up to C$1.0320.” A long position is a bet that an asset will increase in value.
The Standard & Poor’s 500 Index rose 2 percent. Crude oil futures gained 2.4 percent to $88.37 a barrel in New York after losing as much as 0.9 percent.
France and Germany have yet to agree on how to bolster the European bailout fund as they seek to overcome technical hurdles and to complete a plan to stem to debt crisis, said a person with direct knowledge of the talks.
The two countries are working on how to increase the effective power of the European Financial Stability Facility rescue fund said the person, who declined to be named because the talks are not public. Such a measure needs to be part of a comprehensive agreement to help banks and Greece, the person said.
European Plans
European leaders have until an Oct. 23 summit to settle differences and flesh out their strategy, they were told by Group of 20 finance ministers and central bankers last week in Paris.
Canada’s currency reached 94.07 cents per U.S. dollar on July 26, the highest since November 2007, on speculation an accelerating global economy would consume more of the nation’s raw materials. The currency has dropped about 8 percent since then on concern European leaders won’t be able to prevent the region’s sovereign debt crisis from spreading to banks.
“The drag on every risky asset is Europe,” said Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York. “Until we have a better view of what they will do, it will be very hard for a sustained period of positive risk sentiment.”
Inflation Pace
The U.S. producer price index climbed 0.8 percent, the most in five months, after no change in August, Labor Department figures showed today in Washington. Economists projected a 0.2 percent gain, according to the median of 71 estimates in a Bloomberg News survey.
“I think we’ll see the Canadian dollar recover today after we hit the sinkhole yesterday,” said Steven Butler, managing director of foreign exchange trading in Toronto at the Bank of Nova Scotia’s Scotia Capital unit, in an e-mail message.
Government debt fell, pushing the yield on Canada’s benchmark 10-year bonds two basis points higher today to 2.31 percent, after it tumbled 11 basis points yesterday. Yields traded about 13 basis points higher than similar-maturity U.S. government debt, from 31 basis points on Oct. 3.
The loonie, as the currency is nicknamed, has declined 3.9 percent this year, according to Bloomberg Correlation-Weighted Currency Indexes. The greenback is down 2.1 percent. The yen is up 4 percent.
Risk Analysis
“The risk-reward is for a higher Canada,” said Michael O’Neill, vice president of foreign-exchange trading at RJOFX Canada, a unit of RJ & O’Brien & Associates Inc., by phone from Toronto. “All the bad news is out there. Canada is going to continue to above par for year-end.”
The Canadian currency will trade at C$1.02 per U.S. dollar by year-end, before appreciating to 98 cents by the end of next year, according to the median of 35 economist and analyst forecasts compiled by Bloomberg.
“We like commodity currencies and currencies with exposure to Asia because we think that’s going to be the high-growth area going into 2012,” said Steven Saywell, head of foreign-exchange strategy for Europe at BNP Paribas SA, by phone from London. “Our top currency picks against a falling U.S. dollar are the Australian dollar, the New Zealand dollar and the Canadian dollar.” BNP predicted the loonie will rise to 94 cents against the U.S. dollar by year-end and 90 cents by the end of 2012.
--With assistance from Allison Bennett in New York. Editors: Paul Cox, Dennis Fitzgerald
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
