Canada’s dollar rose from the weakest this month versus its U.S. counterpart as the discount the nation’s crude oil trades at compared with the American benchmark was at its lowest level in more than three months.
The Canadian currency gained for the first time in four days as China’s Cnooc Ltd. won approval to acquire the U.S. assets of Nexen Inc., the last regulatory hurdle to complete the $15.1 billion takeover of the Canadian oil producer. The currency’s gains came even after Bank of Canada Governor Mark Carney reiterated to lawmakers that the need to raise interest rates is “less imminent than previously anticipated.”
“The Western Canada Select-West Texas Intermediate spread, the narrowing of that spread, is helping the Canadian dollar today, that along with broad U.S. dollar selling,” Greg Moore, currency strategist at Toronto-Dominion Bank, said in a telephone interview from Toronto. “That differential is probably going to get a little more attention over the next little while.”
The loonie, as the Canadian dollar is known for the image of aquatic bird on the C$1 coin, appreciated 0.3 percent to C$1.0023 per U.S. dollar at 5 p.m. in Toronto. Earlier it declined to C$1.0087, the weakest since Jan. 28. One Canadian dollar buys 99.77 U.S. cents.
The U.S. dollar fell against 13 of its 16 most-traded counterparts.
Options traders were the most bearish on the loonie in two weeks, with the three-month 25-delta risk-reversal rate reaching as high as 1.16 percentage point, the most since Jan. 29. The rate shows the premium charged for the right to buy the U.S. dollar versus contracts to sell. It touched 0.91 percentage point on Feb. 5, the least in more than a week.
Canadian government bonds fell, pushing the yield on the benchmark 10-year note up two basis points, or 0.02 percentage point, to 1.99 percent. The 2.75 percent security maturing in June 2022 dropped 20 cents to C$106.39. Two-year yields increased one basis point to 1.12 percent.
The government will auction C$3.3 billion ($3.29 billion) of two-year notes tomorrow. The 1 percent securities are due in May 2015.
Crude oil, Canada’s biggest export, climbed to the highest level in more than a week as OPEC boosted a demand forecast. Futures on crude rose 0.6 percent to $97.56 per barrel in New York and reached $97.79, the highest since Feb. 1.
Canada’s discount for its heavy oil to U.S. West Texas Intermediate increased in recent months because of a lack of pipeline infrastructure to reach markets. The differential for Western Canada Select to the North American benchmark touched $23.75 for a second day, the narrowest level on a closing basis since Oct. 24, before trading at $24. The discount reached a record $42.50 a barrel on Dec. 14.
“The oil story is something that should be on everyone’s screen, that spread and how it behaves, because it’s a billion- dollar difference every month in trade for Canada,” Adam Button, a currency analyst at Forexlive.com, said by telephone from Montreal. “It’s the difference between a trade deficit and a trade surplus.”
Canadian companies are forgoing about C$2.5 billion a month because of the lower prices, according to an estimate by Houston-based investment bank PPHB Securities LP. The differential is costing the Canadian economy C$27 billion a year, Doug Horner, Alberta’s finance minister, said in an interview Jan. 18.
The acquisition of Calgary-based Nexen by the Chinese oil producer was approved by the Committee on Foreign Investment in the U.S., Nexen said in a statement released on CNW today. The panel had jurisdiction because Nexen has oil and gas drilling and platforms in the Gulf of Mexico. The deal is now expected to close the week of Feb. 25.
“Cnooc’s takeover of Nexen cleared the last regulatory hurdle, so people are trying to judge what the impact of that will be,” Darcy Browne, managing director of currencies at Canadian Imperial Bank of Commerce’s CIBC World Markets unit, said by phone from Toronto. “It should be in some form net buying of Canadian dollars. Unless you’re on the inside it’s hard to judge, but we know 25-30 percent of the equity is held in Canadian hands. What we do know is that more than likely it should be some form of Canadian-dollar positive.”
The loonie fell earlier against its U.S. counterpart as the Group of Seven nations pledged not to devalue their currencies in the pursuit of stronger economic growth. Their statement didn’t criticize Japan, whose currency has weakened 8 percent against the greenback this year amid government promises to step up stimulus.
An official from a G-7 nation later said the statement was misinterpreted and the group is concerned about excess moves in the Japanese currency.
“The Canadian dollar is very much on the sidelines of the broader debates which are going around markets right now, which is the currency-war theme,” Jane Foley, senior currency strategist at Rabobank International, said by phone from London. “Whether or not Canada can win back some ground, that’s definitely a potential, but not until the Bank of Canada drops its more dovish tone.”
The Bank of Canada on Jan. 23 pared its forecast on Jan. 23 for economic growth this year to 2 percent, from an October prediction of 2.3 percent, and Carney said an increase in the 1 percent benchmark interest rate was less urgent. Carney repeated the outlook today in testimony to the House of Commons finance committee.
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