Bloomberg News

Canadian Dollar Climbs Against U.S. Counterpart on Risk Appetite

March 26, 2012

Canada’s dollar advanced against its U.S. counterpart for a second day after comments from the leaders of Germany and the Federal Reserve stoked demand for higher-yielding assets, such as stocks and commodities.

The currency rose against a majority of its most-traded peers on speculation the nation’s exports may benefit from growth in the U.S., as economists predicted a report this week will show orders for American durable goods rose in February. It appreciated the most against the U.S. dollar in more than two weeks as crude oil, Canada’s largest export, topped $107 barrel in New York.

Fed Chairman Ben S. Bernanke “was back to his old ways with a dovish tone that has given the market a risk lift, and we found the Canadian dollar had a good day,” said Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia (BNS)’s Scotia Capital unit. “His comments definitely gave the market that extra push into strong risk mode.”

Canada’s currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, rose 0.7 percent to 99.06 cents per U.S. dollar at 5 p.m. in Toronto, its biggest gain since March 8. One Canadian dollar buys $1.0095.

Government bonds fell, with the yield on the benchmark two- year security rising one basis point, or 0.01 percentage point, to 1.25 percent. The spread between Canadian and U.S. two-year debt widened to about 91 basis points, with the American benchmark yielding 0.34 percent.

The loonie rose after Chancellor Angela Merkel said Germany may back plans for the temporary and permanent euro-area rescue funds to run at the same time.

Run in Parallel

“We could imagine that the program that has already been agreed with 200 billion” euros ($266 billion) could run in parallel with the permanent European Stability Mechanism, which comes into force in July, Merkel told reporters in Berlin today.

Canada’s currency extended gains after Bernanke said accommodative monetary policy is still needed to reduce U.S. unemployment, increasing speculation of further monetary stimulus.

“Last time we heard Bernanke, he seemed more neutral,” Butler said. “There are still a lot of people who think quantitative easing is a possibility and his comments will have the doves chirping about that.”

The loonie’s 1.6 percent gain is the second-best performance over the past month among 10 major currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The pound and the greenback, with gains of 1.7 percent and 0.7 percent are the index’s first- and third-best.

‘Rate-Hike Expectations’

“We’re sure to see some interest develop in the Canadian dollar throughout the week,” Jack Spitz, managing director of foreign exchange at National Bank of Canada (NA) in Toronto, wrote in a note to clients today, citing tomorrow’s Ontario budget and the March 29 federal budget. “A more constrictive budget than expected could see rate-hike expectations get pushed out further.”

The Standard & Poor’s 500 Index rose 1.4 percent. Crude oil for May delivery added 0.2 percent at $107.11 a barrel on the New York Mercantile Exchange after dropping as low as $106.19 before the Bernanke speech. Prices are up 8.4 percent this year.

The correlation between the loonie and crude futures has been increasing, with the correlation coefficient at 0.47 today, up from 0.30 last month. A correlation coefficient of 1 means the measures move in lockstep. The currency’s correlation with the S&P 500 was 0.77 today, compared with 0.61 for copper and 0.46 for the U.S.-Canada two-year yield spread, 30-day correlation data show.

“The Canadian dollar is one of the oil currencies, very tightly tied to developments in oil prices,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG, by phone from London. “The fact the oil is still elevated and the U.S. economy is leading the rest of the world, I think that should benefit Canada because of the close trading links with the U.S.”

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