Bloomberg News

Canadian Currency Strengthens Most Since January on Global Growth Outlook

March 03, 2012

Canada’s dollar strengthened the most since January versus its U.S. counterpart on speculation accelerating global growth will boost the nation’s exports, bolstering the case for interest-rate increases.

The Canadian currency was the best performer this week against 14 of its 16 most-traded counterparts as the price of crude oil, the country’s biggest export, touched the highest level since 2008. Jobless-insurance claims fell and consumer confidence rose in the U.S., the nation’s biggest trade partner. Bank of Canada policy makers meet next week.

“Positive sentiment across global markets was the big driver for the Canadian dollar,” said Blake Jespersen, director of foreign exchange at Bank of Montreal in Toronto. “The improving U.S. economy and rising oil prices are helping.”

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, advanced 1 percent to 98.93 cents per U.S. dollar yesterday in Toronto, from 99.93 cents on Feb. 24. It was the biggest five-day gain since Jan. 27.

The currency touched 98.42 cents on March 1, the strongest since September, before snapping a four-day winning streak yesterday. One Canadian dollar buys $1.0108.

Longer-term government bonds rose, pushing the yield on the benchmark 10-year note down six basis points, or 0.06 percentage point, to 1.96 percent. The yield reached 1.837 percent in December, a record low.

Yields on Canada’s two-year note gained three basis points to 1.11 percent. They touched 1.13 percent on March 1, the highest level since Oct. 28.

Curve Flattens

The yield difference between two- and 10-year government bonds, plotted on the yield curve, narrowed to 86 basis points yesterday, the least since September 2008, from 95 basis points a week earlier. A flatter yield curve generally signals a worsening economic outlook.

Canadian central bankers meet March 8 to determine interest rates. They have held their benchmark at 1 percent since September 2010 as concern that some European countries may face default tempers an annual inflation rate exceeding the central bank’s 2 percent target for 14 straight months.

The loonie gained this week as data showed manufacturing from China to the U.S. was expanding as the American recovery strengthened and European leaders worked to contain the region’s debt crisis. That spurred speculation demand for raw materials will increase, with Barclays Capital predicting a third consecutive annual shortage in global copper supplies in 2012. Commodities beat stocks, bonds and the dollar last month for the first time since July.

Commodity Currency

Canada derives about half its export revenue from raw materials including crude oil, copper, gold, timber and wheat. It’s the largest supplier of crude to the U.S., the world’s biggest economy. Canada also is the world’s second-largest producer of uranium after Kazakhstan, the third-biggest producer of natural gas and the third-largest exporter of wheat.

Brent crude surged to $128.40 a barrel in London two days ago, the highest price since July 2008, before ending the week at $123.63. Copper futures gained for a second week, rising to $3.9070 a pound in New York.

“The rise in the price of crude oil is supportive for the Canadian dollar,” Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said yesterday. “We expect modest Canadian-dollar strength against the U.S. dollar over the next one to three months.”

The Standard & Poor’s 500 (SPX) Index rose 0.3 percent in a third weekly advance, after climbing on Feb. 29 to the highest level in almost four years.

Euro Falls

The Canadian dollar advanced 2.9 percent against the euro this week, the most since January 2011, to C$1.3056 as the European Central Bank loaned 800 banks 529.5 billion euros ($712.2 billion) on Feb. 29 to bolster liquidity.

The loonie fell against the greenback yesterday for the first time in five days after data showed Canada’s gross domestic product slowed to a 1.8 percent annualized pace from October to December, following a revised 4.2 percent third- quarter rate. The fourth-quarter figure matched the median forecast in a Bloomberg survey of economists.

Canada’s currency gained earlier in the week as U.S. Labor Department data showed applications for unemployment benefits fell to 351,000 in the week ended Feb. 25, a level matching the lowest since March 2008. The Conference Board’s gauge of confidence among American consumers climbed more than forecast to a reading of 70.8, the highest level in a year.

Canadian employers added a net 14,500 jobs last month, economists in a Bloomberg survey forecast before the government issues the data March 9. Payrolls grew by 2,300 in January.

Volatility Rises

Implied volatility for one-month options on Canada’s dollar versus the greenback increased from the lowest level in almost five years. It touched 7.63 percent on March 1 after reaching 6.90 percent on Feb. 24, the least on an intraday basis since June 2007. Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency. The five-year average is 12 percent.

The loonie weakened 1.7 percent over the past year, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The U.S. dollar gained 0.5 percent, while the euro tumbled 4.5 percent.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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


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