Bloomberg News

Canada Dollar Gains for Third Week on Europe Debt Plan Optimism

October 22, 2011

Oct. 22 (Bloomberg) -- Canada’s dollar reached its strongest level this month amid growing optimism that European Union leaders will make headway in containing the region’s debt crisis, bolstering demand for riskier assets.

The loonie, as the currency is nicknamed, rose for the third straight week in the longest streak since April, as European finance ministers met in Brussels to start a six-day effort aimed at staving off a Greek default and shielding banks from the fallout. Irish Finance Minister Michael Noonan said “progress was made” at the meeting. Bank of Canada policy makers will keep the benchmark rate unchanged at 1 percent, where it’s been since September 2010, when they meet Oct. 25, according to a Bloomberg News survey of 25 economists.

“The loonie is very much tethered to that EU story, and people are holding onto an optimistic scenario,” Stewart Hall, a currency strategist at Royal Bank of Canada’s RBC Dominion Securities unit, said yesterday in a telephone interview from Toronto. “It’s an agonizing process that involves kicking the proverbial can down the road. It’s created quite a difficult environment for market participants who are tasked with the job of pricing money.”

Canada’s currency rose 0.3 percent to C$1.0066 per U.S. dollar in Toronto from C$1.0098 Oct. 14. It touched C$1.0044 on Oct. 17, the strongest level since Sept. 21. One Canadian dollar buys 99.34 U.S. cents.

Tight Trade

The currency fluctuated this week in a two-cent range, dropping as low as C$1.0264 per U.S. dollar and rising as high as C$1.0044. It rose versus 10 of its 16 most-traded counterparts, including gains against the New Zealand dollar and the Brazilian real.

German officials said yesterday there are several possible ways of involving the International Monetary Fund to boost the firepower of the European Financial Stability Facility, the region’s rescue fund, to fight the debt crisis.

“The market thinks there will be some sort of sweeping solution, a 1 to 2 trillion euro expansion of the EFSF and a recapitalization of the banks in jeopardy,” Firas Askari, head of currency trading at Bank of Montreal’s BMO Capital Markets unit, said from Toronto. “Anything short of that now is going to really disappoint.”

Government of Canada bonds rose last week, pushing 10-year yields down four basis points, or 0.04 percentage point, to 2.36 percent. The price of the 3.25 percent securities maturing in June 2021 gained 34 cents to C$107.60.

Bond Sale

Canada sold C$3.5 billion ($3.5 billion) of two-year bonds Oct. 19, drawing an average yield of 1.097 percent for the 1 percent securities and a bid-to-cover ratio of 2.38 times, according to the central bank’s website.

The Standard & Poor’s 500 Index rose 1.1 percent, while Canada’s benchmark S&P/TSX Composite Index also advanced 1.1 percent. Futures on crude oil added 0.3 percent to $87.53 a barrel in New York trading.

Bank of Canada policy makers will make their next rate decision Oct. 25 at 9 a.m. New York time. The central bank will release its monetary policy report on Oct. 26, updating its forecasts for the country’s economy that were last revised July 20.

“We expect that the subtly hawkish bias introduced last month will remain in place, suggesting that holding the overnight rate lower for longer is the preferred policy option to contemplating an outright cut,” David Tulk, chief Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit, said yesterday in a note to clients.

Price Path

Canada’s consumer price index increased 3.2 percent in September from a year earlier, Statistics Canada said yesterday. Economists surveyed by Bloomberg News predicted a 3.1 percent reading according to the median of 25 estimates.

“Yes, CPI is running to the high side, but at this point in time we know that central banks in the developed world are showing a greater tolerance for upsides on inflation, given the dire global macro backdrop,” said Hall at RBC. “When you have to choose between a little inflation and a full-on cascading financial crisis, inflation gets trumped.”

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 U.S. producer price index climbed 0.8 percent, the most in five months, after no change in August, Labor Department figures showed Oct. 18 in Washington. Economists projected a 0.2 percent gain, according to the median of 71 estimates in a Bloomberg News survey.

The loonie 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.

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 32 economist and analyst forecasts compiled by Bloomberg.

--Editor: Paul Cox, Greg Storey

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

To contact the editor responsible for this story: David Scanlan at dscanlan@bloomberg.net


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