Canada’s dollar advanced to the strongest level in three months against its U.S. counterpart as risk appetite swelled and stocks and crude oil, the nation’s biggest export, climbed.
The currency gained versus all of its 16 most-traded counterparts except the Norwegian krone after a gauge of Canadian business spending increased more than forecast. Federal Reserve Bank of Boston President Eric Rosengren called today for “open-ended” monetary easing, and Germany’s government backed a European Central Bank bond-buying plan, a spokesman said yesterday. U.S. employment rose in July, data showed last week.
“Investor sentiment has been boosted by signs of resilience in the U.S. economy and expectations that we could see a move by the ECB before too long to help take some pressure off the sovereign bond markets in the euro zone,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a telephone interview.
Canada’s currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, appreciated 0.3 percent to 99.70 cents at 5 p.m. in Toronto, and reached 99.63 cents, the strongest since May 11. One Canadian dollar buys $1.003.
Canadian government bonds dropped for a second day, pushing the benchmark 10-year yield up nine basis points, or 0.09 percentage point, to 1.84 percent. It touched 1.85 percent, the highest level since June 7. The price of the 2.75 percent security due in June 2022 fell 87 cents to C$108.13.
Implied volatility for one-month options on the U.S. dollar versus the Canadian currency touched 6.36 percent, after reaching 6.22 percent on July 20, the lowest level since 2007. The five-year average is 12 percent. Implied volatility, which traders quote and use to set option prices, signals the expected pace of currency swings.
Decreased volatility makes investments of currencies of nations with higher benchmark interest rates more attractive because there is less risk of market moves erasing profits.
ECB President Mario Draghi’s announcement last week that bank officials are working on the details of a bond-buying plan helped move volatility lower, Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto, said in a telephone interview.
“It’s just the belief that with tail risk being removed by central banks, it opens up the door to a risk rally,” Sutton said. “The key is really volatility, and when volatility is this low typically we see risk rallies.”
North American stocks rose amid speculation global central banks will take steps to spur economic expansion. Rosengren said in a CNBC interview the Fed should pursue an “open-ended” easing program of “substantial magnitude” to boost growth and hiring. German Chancellor Angela Merkel backed a bond-buying plan announced last week by the ECB to curb the euro bloc’s debt crisis, a government spokesman said yesterday.
The S&P 500 Index advanced 0.5 percent, and the S&P/TSX Composite Index (SPTSX), the benchmark Canadian equities gauge, climbed 1.7 percent.
“There will come a time when investors will want to see a lot of this hope replaced with actual policy prescriptions from officials,” Western Union’s Manimbo said. “If we don’t get that before too long, we could see an unraveling of the latest risk rally.”
Crude oil for September delivery rose for a third day, gaining as much as 2.4 percent to $94.42, the highest level since May 15. Standard & Poor’s GSCI Index of raw materials advanced 1.1 percent. Raw materials including oil account for about half of Canada’s export revenue.
“The pickup in crude oil prices is also a contributing factor, so we’re seeing a bid to the commodity markets as well, that’s also another factor, and we don’t look at any of them in isolation,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said in a phone interview.
The loonie extended gains as Canada’s Ivey purchasing managers’ index for July rose to 62.8, the highest since March, compared with 49 in June, according to the Purchasing Management Association of Canada. Readings higher than 50 suggest government and company purchases increased. Economists surveyed by Bloomberg News forecast a reading of 52.
Canadian building permits fell 2.5 percent in June, less than forecast, Statistics Canada data showed in Ottawa. Economists in a Bloomberg survey estimated a 3.9 percent drop.
Payrolls in the U.S., Canada’s biggest trade partner, added 163,000 jobs in July after a revised 64,000 gain in June that was less than first reported, government data showed on Aug.3.
“We see the Canadian dollar outperform as we see the markets finding themselves less driven by the headline news and more by fundamentals,” National Bank’s Spitz said. The currency may reach 99.50 cents per U.S. dollar this week, he said.
The loonie gained 0.4 percent over the past month against nine developed-nation counterparts monitored by Bloomberg Correlation-Weighted Indexes. The U.S. dollar fell 2.1 percent, while the Australian dollar gained 1.6 percent.
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