Bloomberg News

Canadian Currency Reaches Five-Week High as Risk Appetite Gains

December 12, 2011

Dec. 10 (Bloomberg) -- The Canadian dollar reached its strongest level in five weeks as signs of growth in the U.S., the nation’s biggest trade partner, and Europe’s latest plans to tackle its debt crisis fueled appetite for riskier assets.

Canada’s currency rose versus 11 of its 16 most-traded peers as U.S. consumer confidence jumped to a six-month high and stocks rallied. The Bank of Canada said growth in the domestic and U.S. economy is stronger than forecast. Data showing the American economy is building momentum may ease pressure on the Federal Reserve, which meets next week, to buy more bonds.

“The Canadian dollar did somewhat better against the U.S. dollar than we anticipated,” David Watt, a senior currency strategist in Toronto at Royal Bank of Canada, the nation’s largest lender, said yesterday in a telephone interview. “Markets are seeing a rebound in U.S. consumer confidence and some better economic data out of the U.S.”

Canada’s currency, also known as the loonie for the image of the aquatic bird on the C$1 coin, appreciated 0.3 percent to C$1.0169 per U.S. dollar yesterday in Toronto, from C$1.0195 on Dec. 2. The loonie touched C$1.0052 on Dec. 8, the strongest level since Nov. 1. One Canadian dollar buys 98.34 U.S. cents.

The loonie gained 1.4 percent over the past month in the best performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The dollar rose 0.5 percent, while the euro dropped 0.8 percent.

The Standard & Poor’s 500 Index gained 0.9 percent in its second straight weekly advance.

Bonds Gain

Canadian government bonds rose, pushing yields on the benchmark 10-year note down to 1.979 percent on Dec. 8, the lowest level in Bloomberg records. The yields decreased five basis points for the week, or 0.05 percentage point, as prices on the 3.25 percent securities due in June 2021 added 43 cents to C$110.17.

Canada will auction C$3 billion ($2.95 billion) of three- year notes on Dec. 14, according to a statement on the Bank of Canada’s website. The 1 percent securities mature in February 2015. The previous three-year auction, on Nov. 2, drew an average yield of 1.219 percent and a ratio of 2.36 times the bids for the amount on offer.

The government sold C$3.5 billion of two-year notes on Dec. 7, fetching an average yield of 0.937 percent.

EU Leaders

The loonie gained yesterday, reversing earlier losses, after EU leaders holding all-night talks in Brussels added 200 billion euros ($267 billion) to their crisis-fighting warchest and tightened anti-deficit rules. European Central Bank President Mario Draghi hailed the moves as a “very good outcome.”

The currency also advanced as the Thomson Reuters/University of Michigan preliminary index of U.S. consumer sentiment rose to 67.7 this month from 64.1 at the end of last month. The median estimate of 73 economists surveyed by Bloomberg News was a reading of 65.8. The data overshadowed a report showing Canada posted an unexpected trade deficit in October as energy shipments helped push imports to a record.

A day earlier, the U.S. Labor Department said the number of Americans filing applications for unemployment benefits last week fell by 23,000 to 381,000, the fewest since February.

Household incomes in the U.S. are growing faster than currently estimated as tax revenue from employee pay was up 4.8 percent in the third quarter from a year earlier, according to a client note this week from Joe LaVorgna, chief U.S. economist at Deutsche Bank AG in New York.

Intertwined With U.S.

“What we’re seeing is some stabilization in those economic numbers,” Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotia Capital unit in Toronto, said yesterday in a telephone interview. “Our economy is intertwined with the U.S., and so what happens in the U.S. tends to follow in Canada.”

The Canadian dollar erased a decline on Dec. 6 after the Bank of Canada held its benchmark interest rate at 1 percent, damping speculation it would signal cuts. While Europe’s sovereign-debt crisis raised risks to the global economy, there’s “considerable monetary stimulus” in Canada with interest rates near historic lows and the financial system “functioning well,” policy makers led by Governor Mark Carney said in a statement.

‘Unique Position’

“Canada is in a unique position in that they are less exposed to Europe and China and more heavily reliant on the U.S.,” Kathy Lien, director of currency research at the online trading firm GFT Forex in New York, wrote Dec. 6 in a note to clients. That the Bank of Canada “did not even hint about the possibility of lower interest rates was enough to send the Canadian dollar sharply higher.”

Policy makers on the Federal Open Market Committee, meeting Dec. 13, may concentrate more on how they communicate with the public than whether they should purchase more assets to stimulate the economy. The central bank bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June in two rounds of quantitative easing.

“Recent economic data takes away some of the urgency for the need to engage in a new round of quantitative easing,” Michael Feroli, a former Fed economist who is now chief U.S. economist at JPMorgan Chase & Co. in New York, said this week. The FOMC “can say, ‘Let’s wait and see if this is going to build on itself.’”

The central bank already pledged it won’t raise interest rates from near zero until at least 2013.

--With assistance from Chris Fournier in Montreal, Robert Willis And Craig Torres in Washington and Caroline Salas Gage in New York. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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