Bloomberg News

Canadian Dollar Strengthens for 3rd Day as Risk Assets Climb

June 06, 2012

Canada’s dollar appreciated for a third day versus its U.S. counterpart, the longest streak since April, as speculation global policy makers will take steps to spur economic growth propelled equities and commodities.

The currency gained against the majority of its most-traded counterparts after European Central Bank President Mario Draghi said officials stand ready to act as the euro bloc’s growth outlook worsens. Economists in a Bloomberg survey predict Statistics Canada will say on June 8 the nation’s employers added 5,000 jobs last month.

“A decisive move higher in underlying equities has shown itself once again to be a big influence in what’s pushing the Canadian dollar stronger,” Jack Spitz, managing director of foreign exchange at National Bank of Canada (NA) in Toronto, said in a phone interview. “There’s been a widespread bid to the markets that are most strongly correlated with the Canadian dollar,” he said, citing crude oil, gold and equities.

Canada’s currency, nicknamed the loonie, rose 1 percent to C$1.0276 per U.S. dollar at 5 p.m. in Toronto, its biggest intraday move since April 17. One Canadian dollar buys 97.33 U.S. cents.

Yields on the nation’s two-year government securities gained six basis points, or 0.06 percentage point, to 1.06 percent, the third straight gain. They reached 0.86 percent on June 1, the lowest this year, as investors sought refuge in top- rated sovereign debt. The price of the 2.25 percent bonds due in August 2014 dropped 14 cents to C$102.54.

Stocks, Commodities

Canadian two-year bonds yielded 79 basis points more than equivalent-maturity U.S. securities, up from 63 on June 1. The spread was 117 basis points on April 27, widening on speculation Canada’s central bank would raise borrowing costs this year to cool inflation.

Equities and commodities rallied on prospects policy makers will act to spur economic growth. The Standard & Poor’s 500 Index (DXY) gained 2.3 percent, while the MSCI World Index of equities in developed nations climbed 2.2 percent. Both increases were the biggest for their respective indexes since Dec. 20. Crude oil, the nation’s largest export, rose 1.5 percent and the S&P GSCI Index of raw materials added 1.5 percent.

The 30-day correlation coefficient between the Canadian dollar and the S&P 500 rose to 0.84 today, from 0.76 at the end of May, Bloomberg data show. A coefficient of 1 means the measures move in lockstep. The correlation has averaged 0.35 over the past decade, and this year ranged between 0.87 in April and 0.58 in March.

Fed Speculation

The loonie’s correlation with crude-oil futures was 0.69 today, and was 0.66 with the spread between two-year Canadian and U.S. government bonds.

Draghi spoke at a news conference in Frankfurt after the ECB left its benchmark rate at a record low of 1 percent. He said policy makers were “ready to act.”

The U.S. Dollar Index fell to its lowest level in more than a week on an intraday basis as investors bet Federal Reserve Vice Chairman Janet L. Yellen and Chairman Ben S. Bernanke would signal increased need for stimulus in appearances late today and tomorrow.

“The market has convinced itself that low rates and free money are the only solution to a problem that is more complex,” Firas Askari, head currency trader at Bank of Montreal (BMO) in Toronto, wrote in an e-mail. “I don’t think the Canadian dollar will run too far one way or another, barring tape bombs ahead of employment data on Friday.”

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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