Bloomberg News

Canada Dollar Reaches 2-Year High Versus Euro After ECB Rate Cut

July 05, 2012

The Canadian dollar strengthened to a two-year high against the euro after the European Central Bank cut interest rates to stimulate the bloc’s economies.

The loonie, as the currency is nicknamed, reached a seven- week high against the greenback, as reports indicated faster- than-forecast jobs growth in the U.S., the nation’s largest trading partner. China cut interest rates for the second time in a month and the Bank of England said it would extend its asset- purchase program.

“There is a commitment from central bankers to protect the stability of financial markets and maintain loose policy,” said Camilla Sutton, head of currency strategy in Toronto at Bank of Nova Scotia (BNS), in a phone interview. “That’s somewhat supportive of growth, and also important for growth are commodity currencies like Australia and Canada.”

Canada’s currency gained 1 percent to C$1.2569 per euro at 5 p.m. in Toronto, touching the strongest level since June 2010. The loonie was little changed against the greenback at C$1.0142 per U.S. dollar, after reaching the highest level since May 16. One Canadian dollar buys 98.60 U.S cents.

Implied volatility for one-month options on the Canadian dollar versus the euro fell to 7.92 percent, down from 9.53 percent June 6. The five-year average is 11.7 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.

Price Swings

Lower volatility is “highly encouraging” that high risk aversion trading in May will likely continue to lessen, Sutton said, adding that the euro will trade more on “fundamentals as opposed to fear of what could be.”

Government bonds rose, with the yield on the nation’s 10- year benchmark bonds trading at 1.82 percent. The Bank of Canada announced it will sell C$3.4 billion five-year notes on July 11. The bonds mature Sept. 9, 2017 and carry a coupon of 1.5 percent.

Pacific Investment Management Co.’s Ed Devlin said Canadian bonds don’t provide much value for investors as low yields limit scope for capital gains and global uncertainty prompts the world’s largest bond fund manager to take “defensive” positions.

Devlin, executive vice president and head of the Canadian portfolio management team at Pimco, said he’s underweight on Canadian short-term fixed income and has recently preferred bonds that allow investors to hedge against consumer-price gains.

Market View

“We’re not particularly long the Canadian market,” Devlin, a London-based portfolio manager, said in a telephone interview from Toronto. “I’m pretty defensive on the front end. There is not a lot to like about interest rates down here.”

The ECB cut its key interest rate by 25 basis points to a record 0.75 percent and reduced its deposit rate to zero for the first time. The shared currency weakened against 14 of its 16 major peers as ECB President Mario Draghi said some risks to growth have “materialized.” The pound dropped against the Canadian dollar as the Bank of England extended its asset- purchase program.

Canada’s central bank has kept its benchmark rate unchanged at 1 percent since September 2010.

Canada’s jobless rate is forecast to stay unchanged from May at 7.3 percent, according to a Bloomberg survey of economists before Statistics Canada agency release data tomorrow. The country is projected to have added 5,000 jobs in June, compared with a gain of 7,700 the month before.

Jobs Data

Roseland, New Jersey-based ADP Employer Services showed U.S. companies added 176,000 workers this month. The median forecast of economists surveyed by Bloomberg News called for a 100,000 advance.

“The employment situation in Canada does look relatively stronger than the U.S.,” said Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD)’s TD Securities unit, in an interview. “It’s still a very slow job recovery situation in the U.S.”

A U.S. government report this week is projected to show employers added fewer than 100,000 workers for a third month in June. U.S. payrolls added 95,000 workers last month after a 69,000 gain in May, a Bloomberg survey showed before the Labor Department data on July 6.

The loonie has gained 1.9 percent this year among 10 developed-nation currencies in Bloomberg Correlation-Weighted Indexes, with the U.S. dollar adding 1.1 percent.

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net

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


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