Bloomberg News

Canada Dollar Reaches Highest Since October After Fed Statement

January 26, 2012

Jan. 25 (Bloomberg) -- Canada’s dollar gained to the strongest in almost three months after U.S. policy makers said their key interest rate will stay at almost zero until at least late 2014, boosting the attraction of Canada’s 1 percent rate.

The currency fell earlier as speculation that Europe may be unable to contain its sovereign-debt crisis damped demand for riskier assets. Commodities including crude oil, Canada’s biggest export, climbed after the Federal Reserve’s statement.

“The market is buying the Canadian dollar, as it has a long-standing correlation with commodities, which have taken off on the back of these lower interest rates,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “It’s more of a knee-jerk reaction to the extension of the accommodative policy.”

Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, appreciated 0.5 percent to C$1.0043 per U.S. dollar at 5 p.m. Toronto time. It was the strongest level on a closing basis since Oct. 31. The currency earlier dropped as much as 0.6 percent. One Canadian dollar purchases 99.57 U.S. cents.

The U.S. dollar fell versus 14 of its 16 most-traded peers.

Crude oil for March delivery gained 0.5 percent to $99.74 a barrel in New York, after falling earlier as much as 1.7 percent and rising 1.2 percent. The Thomson Reuters/Jefferies CRB Index of raw materials advanced 0.5 percent. Canada derives about half of its export revenue from the sale of raw materials, including crude. The Standard & Poor’s 500 Index added 0.9 percent.

Bonds Rise

Canadian government bonds rose, pushing benchmark 10-year note yields down four basis points, or 0.04 percentage point, to 2.04 percent. It was the yields’ first decline in six days.

The Federal Open Market Committee has kept its benchmark rate at a range of zero to 0.25 percent since December 2008 in an effort to support the economy. Inflation remains tame and more than two years of economic growth have failed to push unemployment below 8.5 percent.

“The committee expects to maintain a highly accommodative stance for monetary policy,” the FOMC said in a statement released in Washington today after a two-day policy meeting. “Economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

Fed Chairman Ben S. Bernanke, speaking at a news conference, said the option of further large-scale bond purchases is still “on the table.” The Fed bought $2.3 trillion of debt in two rounds of quantitative easing.

End of 2014

Nine of 17 Fed officials expect borrowing costs will remain below 1 percent at the end of 2014, with six officials expecting zero rates to remain into 2015. The projections by FOMC members were released today for the first time. An increase in 2014 would mark the first rise in the fed funds rate since June 2006.

“The market seems to think the low rates will be somewhat stimulative, but I think it’s a bit troubling the Fed didn’t acknowledge that the economy is improving,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal.

The Bank of Canada held its overnight rate target at 1 percent last week. Bond investors are abandoning bets Canadian policy makers will cut interest rates this year as rising consumer debt means the central bank is less likely to ease, even as authorities from India to Israel to Brazil add stimulus.

Odds Fall

The odds the Bank of Canada will lower its policy interest rate by September have fallen to less than 30 percent from more than 50 percent on Jan. 16, before a policy-maker decision to keep the rate unchanged, according to Bloomberg News calculations based on overnight index swap data. Economists in a Bloomberg survey with 21 responses predict the Bank of Canada will lift borrowing costs by the first quarter of 2013.

“The Bank of Canada has also been highly accommodative, and has a commitment to hold rates lower,” National Bank’s Spitz said. “Does that mean they are going to hold steady until 2014? I don’t think so.”

Mark Carney, governor of the Bank of Canada, has maintained a 1 percent interest rate since September 2010. It is the longest pause since the Bank adopted the overnight policy rate in 1994. Carney raised the rate in 2010 from 0.25 percent after cutting it to that level to support the economy during the financial crisis.

Bond Auction

Canada sold C$3 billion ($2.96 billion) of three-year notes today, drawing an average yield of 1.159 percent, the central bank said on its website. The 1 percent securities mature in February 2015.

The auction’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount sold, was 2.41 percent. The previous sale of three-year debt on Dec. 14 fetched an average yield of 1.023 percent and had a coverage ratio of 2.53. The average ratio over the past five offerings of three-year securities is 2.46.

The loonie sank 0.2 percent over the past week against nine developed-nation counterparts monitored by Bloomberg Correlation-Weighted Currency Indexes. The dollar dropped 0.9 percent, while the euro gained 0.3 percent.

The Canadian currency fell earlier after the European Central Bank was said to oppose restructuring its Greek bonds, while the International Monetary Fund said European governments may have to boost Greek support. The region’s sovereign-debt crisis began in Greece more than two years ago.

--With assistance from Cecile Gutscher in Toronto. Editors: Greg Storey, Dennis Fitzgerald

To contact the reporter on this story: Austen Sherman in New York at asherman18@bloomberg.net

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


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