Bloomberg News

Canadian Currency Advances on Growth Outlook as Crude Oil Climbs

July 18, 2012

Canada’s dollar appreciated against its U.S. counterpart and the euro as oil rose to the highest since May and stocks advanced, burnishing the outlook for currencies that benefit from global demand.

The currency erased losses after the Bank of Canada said in its monetary policy report that consumers and business investment will lead modest economic growth through 2014, while weaker global demand curbs exports. Canada derives about half its export revenue from raw materials. The central bank reiterated the next move in interest rates may be upward.

“We do have oil prices that are back near $90 a barrel,” said David Watt, chief economist in Toronto at HSBC Holdings Plc’s HSBC Bank Canada unit, in a telephone interview. “That’s certainly helping commodity currencies. There was a bit too much overall bearishness priced in.”

Canada’s currency, nicknamed the loonie, rose 0.2 to C$1.0102 per U.S. dollar at 5:07 p.m. in Toronto after dropping as much as 0.3 percent. It advanced 0.3 percent to C$1.2410 versus the euro. One Canadian dollar buys 98.97 U.S. cents.

Canada’s legal tender is up 2.4 percent this year, the third-best performance in Bloomberg Correlation-Weighted Indexes. It trails gains by its commodity-linked peers of Australia, 2.9 percent higher, and New Zealand, 4.5 percent stronger, on speculation higher-risk assets will benefit as central banks increase stimulus to spur growth.

Diversification Trade

“For commodity currencies, it’s not just a simple risk-on, risk-off trade you saw after the 2008 crisis,” said Jane Foley, a senior currency strategist at Rabobank International, by phone from London. “You have this diversification trade going on alongside that, which can complicate the picture.”

The Standard & Poor’s 500 Index climbed 0.7 percent. Crude oil futures added as much as 0.9 percent to $90.04 a barrel in New York. Copper for September delivery rose as much as 0.5 percent.

Government bonds rose, sending the benchmark 10-year yields lower by two basis points, or 0.02 percentage point, to 1.62 percent. The yield touched 1.598 percent two days ago, the lowest since 1950. The price of the 2.75 percent security due in June 2022 rose 20 cents to C$110.28.

Enbridge Pipelines Inc. sold the first century bonds in Canadian dollars since 1997, taking advantage of surging demand for higher returning debt with benchmark yields at record lows to finance the expansion of crude shipments across the continent.

Century Bonds

The C$100 million ($99 million) of bonds, with a maturity of 2112, were sold yesterday by the unit of Calgary-based Enbridge Inc. (ENB) to a single investment fund with long-term liabilities, said a person with direct knowledge of the transaction who isn’t authorized to comment on the sale. Colin Gruending, Enbridge’s treasurer, declined to name the buyer in an interview.

Declining interest rates around the world are draining income for insurers and pension funds that often aim for minimum annual returns of around 8 percent on investments. Canada’s 30- year benchmark bond yielded 2.25 percent, close to the lowest in two decades.

Canada’s central bank yesterday kept its target overnight rate at 1 percent and trimmed growth forecasts for this year and next, while reiterating the interest-rate increases are possible.

The bank’s outlook “includes a gradual reduction in monetary stimulus over the projection horizon, consistent with achieving the inflation target,” policy makers said in the report, repeating language from its last report in April.

“ You’re seeing a slight strengthening in risk currencies across the board,” said John Curran, a senior vice president in Toronto at CanadianForex Ltd., an online foreign-exchange dealer, in a telephone interview. “Even though the Bank of Canada lowered growth forecasts, they did retain the tightening bias. That should lend a hand to Canadian dollar strength.”

Curran said a drop below C$1.01 was a “green light” to buy U.S. dollars.

The loonie will end the year at C$1.02 per U.S. dollar, according to median estimate of 45 forecasters surveyed by Bloomberg News.

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

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


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