Bloomberg News

Canada Dollar Strengthens for 2nd Quarter on U.S. Growth Outlook

March 31, 2012

Canada’s dollar rose for a second quarter versus its U.S. counterpart as the outlook for the American economy improved and speculation the euro-zone debt crisis may be easing lifted demand for higher-risk currencies.

The currency traded as low as C$1.0319 in early January before rallying to 98.42 cents per U.S. dollar this month as the Standard & Poor’s 500 Index gained. Optimism over accelerating global growth bolstered demand for Canada’s raw materials, which account for about half of export revenue. Bank of Canada Governor Mark Carney speaks in Waterloo, Ontario, on April 2.

“Better U.S. data is constructive for Canada,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, wrote in an e-mail. “The reduced uncertainty on Europe and the global outlook have helped pare Bank of Canada rate-easing expectations for 2012, which helped the Canadian dollar.”

The loonie, nicknamed for the image of the aquatic bird on the C$1 coin, rose 2.4 percent in the quarter to 99.87 cents against the U.S. dollar yesterday in Toronto. One Canadian dollar purchased $1.0013. It ended last year at C$1.0213.

Stocks rallied on prospects for accelerating global growth as Greece won a second international bailout and bond spreads in Italy and Spain narrowed, sending volatility measures to almost record lows. The Standard & Poor’s 500 Index gained 12 percent this quarter, after an 11 percent gain in the last three months of 2011.

The correlation coefficient between the loonie and the S&P 500 was 0.75 yesterday, versus 0.45 for oil, 0.64 for copper and 0.55 for the U.S.-Canada two-year yield spread, 30-day correlation data show. A coefficient of 1 means the measures move in lockstep.

‘Brighter Prospects’

“I attribute the Canadian dollar doing better to the equity rally and the brighter prospects for the U.S. economy,” Steve Butler, managing director in Toronto at Bank of Nova Scotia (BNS)’s Scotia Capital unit, wrote in an e-mail. “The Canadian dollar has decent fundamentals but the data of late has been disappointing. The Bank of Canada is clearly on hold.”

The loonie dropped 0.2 percent over the past three months, the fourth-worst performer after losses of 1.2 percent by the Australian dollar, 2.7 percent by the U.S. dollar and the yen’s 10 percent drop, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The New Zealand dollar and Norwegian krone were the two biggest gainers.

Government bonds fell this quarter, pushing the yield on the benchmark 10-year note higher by 17 basis points, or 0.17 percentage point, to 2.11 percent. The yield reached 2.297 percent on March 19, the highest since October. It was as low this quarter as 1.887 percent in January.

Since the 1950s

Yields on Canada’s two-year note rose 24 basis points to 1.20 percent, as traders speculated the central bank was moving further from raising rates.

The Bank of Canada has held its target lending rate at 1 percent since September 2010 in the longest pause since the 1950s. Borrowing costs aren’t forecast to advance until the first quarter of 2013, according to economists in a Bloomberg News survey.

Investors bet on 2.2 basis points of tightening by the Bank of Canada’s rate decision in September, according to Bloomberg calculations derived from overnight index (SPX) swaps as of yesterday. That compares with minus 15.77 at the end of last year, the data show.

The yield on the September 2012 bankers’ acceptances contract, a barometer of short-term rate projections, rose to 1.3 percent yesterday, from 1.12 at the end of last year, indicating traders are increasing expectations for policy makers to raise rates.

‘Pretty Contained’

Kim predicts the Canadian dollar will appreciate to 96 cents versus the greenback by the end of June. Scotia Bank sees it weakening to C$1.01, which matches the average forecast of 37 economists and analysts in a Bloomberg News survey.

“We’ve been pretty contained,” Matthew Perrier, Toronto- based director of foreign exchange at Bank of Montreal (BMO), said in a telephone interview, citing the nine-week range of 98.42 cents to C$1.0071. “Even if we do get a break through C$1.0075, I don’t think it’ll go screaming too much higher given the pent-up interest to sell U.S. dollars at better levels.”

He predicted the currency will trade between 99 cents and C$1.0125 next week.

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

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


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