Bloomberg News

Canada Dollar Advances With Equities on Europe Debt Optimism

October 21, 2011

Oct. 21 (Bloomberg) -- Canada’s dollar strengthened against its U.S. counterpart, along with equities and commodities, amid optimism that European policy makers may be moving closer to containing the debt crisis.

The loonie, as the currency is nicknamed, rose earlier after a report showed inflation unexpectedly accelerated in September, lessening speculation that the central bank may cut interest rates in the next few months. European finance ministers started a six-day battle to stave off a Greek default and shield banks from the fallout. As much as 940 billion euros ($1.3 trillion) might be deployed.

“This really is about equities being up,” Firas Askari, head of currency trading at Bank of Montreal’s BMO Capital Markets unit, said by telephone from Toronto. “Canada is not in the spotlight. Foreign exchange is reacting to the other asset classes, primarily equities, which are reacting to the news coming out of Europe. Things are still Europe-centric.”

Canada’s currency rose 0.9 percent to C$1.0066 per U.S. dollar by 5 p.m. in Toronto, helping it finish the week with a gain of 0.3 percent. One Canadian dollar buys 99.34 U.S. cents.

Stocks, Oil

The Standard & Poor’s 500 Index rose 1.9 percent, while Canada’s benchmark S&P/TSX Composite Index advanced 1 percent. Futures on crude oil climbed 1.7 percent to $87.58 a barrel in New York trading.

French President Nicolas Sarkozy and German Chancellor Angela Merkel are scheduled to meet tomorrow in Brussels before a summit the next day and a follow-up leaders’ gathering on Oct. 26 to nail down what they’ve called a “comprehensive” plan.

Germany has endorsed a blueprint in which the euro-area rescue fund -- the European Financial Stability Facility --would be used as an insurance fund, guaranteeing part of cash-strapped governments’ bond sales.

“The market is focused quite intently on the delays that are slowing progress on Europe’s debt crisis,” Shaun Osborne and Greg Moore, foreign exchange strategists at Toronto-Dominion Bank in Toronto, said in a note to clients. “It may be the middle of next week before we get any real clarity” on the subject of the rescue fund, they wrote.

Government of Canada bonds fell, pushing 10-year yields up five basis points, or 0.05 percentage point, to 2.36 percent. The price of the 3.25 percent securities maturing in June 2021 declined 45 cents to C$107.62.

Inflation Reading

Canada’s consumer price index increased 3.2 percent in September from a year earlier, Statistics Canada said today in Ottawa before Bank of Canada policy makers will make their next rate decision Oct. 25. Economists surveyed by Bloomberg News predicted a 3.1 percent reading according to the median of 25 estimates.

“The implication for the Bank of Canada next week is that with rising inflationary pressures, it limits their ability to shift interest rates,” said Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital unit in Toronto, in a telephone interview. “That will take away some of that pressure from the system, which is positive for the currency.”

The central bank will keep its rate unchanged at 1 percent, according to all 25 economists surveyed by Bloomberg.

Investors pared bets the central bank’s next move will be a cut. The three-month overnight index swap rate, which is based on what investors expect the central bank’s rate will average during that period, rose to 0.9655 percent from 0.9635 yesterday.

The Canadian dollar has weakened 4.1 percent this year, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback has declined 3.2 percent, while the yen has gained 3.6 percent.

--Editors: Paul Cox, Dennis Fitzgerald

To contact the reporters for 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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