Bloomberg News

Canada Dollar Gains to Stronger Than Parity After Europe Deal

October 27, 2011

Oct. 27 (Bloomberg) -- Canada’s dollar rose through par with the greenback after European leaders agreed to steps for checking the region’s debt crisis, sparking a risk-asset rally.

The currency rose to the highest versus the greenback in more than a month, headed for the biggest two-day gain since May 2010, as the U.S. economy grew in the third quarter at the fastest pace in a year. Canada’s dollar fell relative to most of its major counterparts after the Bank of Canada cut its forecast this week for the nation’s economic growth.

“The Canadian dollar is being swept up in the euphoria of the perceived solution to the European debt crisis, without any evidence to support it,” 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. “There are so many details that nobody knows about. My suggestion would be looking to sell the Canadian dollar on strength here.”

Canada’s currency climbed as much as 1.5 percent to 98.92 cents per U.S. dollar, the strongest level since Sept. 20, and traded at 99.09 cents, up 1.3 percent, at 5:02 p.m. in Toronto. One Canadian dollar buys $1.0092.

“The positive reaction to the European deal is the overriding factor in the appreciation of all currencies against the U.S. dollar,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, in a telephone interview. “There’s a lot of enthusiasm right now in the market, but the reality check is going to hit at some point.”

Yields Rise

Government bonds dropped for a second day. Yields on benchmark 10-year bonds rose 11 basis points to 2.49 percent, after climbing 12 basis points yesterday. The 3.25 percent securities maturing in June 2021 fell 99 cents to C$106.48.

Canadian 10-year yields narrowed to nine basis points over equivalent-maturity Treasuries, from 17 basis points yesterday.

The Bank of Canada held its benchmark rate at 1 percent two days ago. In its quarterly policy report yesterday, the central bank said the annualized pace of expansion in the world’s 10th largest economy will average 1.8 percent in the four quarters through June, compared with a previous estimate of 2.8 percent.

European leaders meeting yesterday persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of a rescue fund for indebted nations to 1 trillion euros ($1.4 trillion), acting on global pressure to step up the fight against the financial crisis.

Canadian Prime Minister Stephen Harper called the agreement “grounds for cautious optimism,” which now needs to be detailed and implemented.

Broad Losses

Canada’s dollar fell today against 12 of its 16 major counterparts. It’s down against 10 of them in the past month. The greenback is the worst performer today and in October.

U.S. gross domestic product, the value of all goods and services produced, rose at a 2.5 percent annual rate, matching the median forecast of economists surveyed by Bloomberg News and up from a 1.3 percent gain in the prior quarter, Commerce Department figures showed today in Washington. Household purchases, the biggest part of the economy, increased at a more- than-projected 2.4 percent pace.

The Standard & Poor’s 500 Index rose 3.4 percent and crude oil, Canada’s largest export, gained 3.3 percent to $93.90 a barrel in New York.

The European debt agreement “eases some of the tail risks for the global economy but I would imagine that we are still looking at fairly subdued levels of activity for the global economy and for Canada,” said Shaun Osborne, chief foreign- exchange strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto, in an e-mail. “There is still a lot of uncertainty here.”

Moving Averages

The risk that the U.S. dollar will drop against the Canadian dollar back to the 200-day moving average, which stands at 98.11 cents, “looks to be growing again,” Osborne said in a note to clients today.

The U.S. dollar traded at 39 on a 14-day relative strength index against the Canadian dollar, registering the most “oversold” reading since July. A reading below 30 signals that an asset may be due to reverse direction.

The 200-day moving average “is going to serve as a bit of a magnet for the market, given the bearish breakdown we’ve seen in the U.S. Dollar across the board,” said George Davis, chief technical analyst for fixed income and currency strategy in Toronto at Royal Bank of Canada.

--With assistance from Catarina Saraiva in New York. Editors: Paul Cox, Dave Liedtka

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


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