BLBG:Canadian Dollar Rallies Most in Six Weeks After Central-Bank Swaps Move
Canada’s dollar staged its biggest five-day rally since October after central banks including the Bank of Canada took steps this week to make it cheaper for lenders to borrow dollars during emergencies.
The Canadian dollar touched a two-week high yesterday as speculation about a possible European lending plan involving the International Monetary Fund buoyed demand for higher-yielding assets. Bank of Canada Governor Mark Carney is forecast to keep his key interest rate at 1 percent on Dec. 6, three days before European Union leaders meet in Brussels to discuss proposals aimed at progressing toward fiscal union.
“What is going on in Canada is pretty much irrelevant in the context of what will go on in Europe next week,” Shaun Osborne, chief foreign-exchange strategist at Toronto-Dominion Bank in Toronto, said in a telephone interview yesterday. “No one expects rates to budge for quite some time. People will move on pretty quickly and refocus on Europe. The big day is Friday, when everyone is waiting for a rabbit to be pulled out of the hat.”
The loonie, as the currency is also known for the image of the aquatic bird on the C$1 coin, gained 2.6 percent this week to C$1.0195 per U.S. dollar in Toronto, its biggest weekly climb since Oct 14. Canada’s dollar, the world’s seventh-most-traded currency, declined 1.6 percent in November. One Canadian dollar buys 98.09 U.S. cents.
Riskier Assets Soar
Stocks and riskier assets such as commodities soared Dec. 1 after central banks led by the Federal Reserve agreed to cut the premium banks pay to borrow dollars overnight from central banks by half a percentage point to 50 basis points. A basis point is equal to 0.01 percentage point. The so-called dollar swap lines will be extended by six months to Feb. 1, 2013. The European Central Bank and its counterparts from Switzerland, Japan and the U.K. were also part of the coordinated response.
“Broad European market concerns are still there; they have just been sidelined for now by the intervention,” Abdullah Karatash, head of U.S. fixed-income credit trading at Natixis SA in New York, said yesterday in a note to clients.
Canadian government bonds fell this week, pushing the benchmark 10-year yield up two basis points to 2.12 percent. It decreased to a record low 1.99 percent on Oct. 4. The price of the 3.25 percent securities maturing in June 2021 declined 21 cents to C$109.73.
Carney will probably leave the overnight policy rate at 1 percent on Dec. 6, according to a Bloomberg survey of 21 economists. Carney said in Montreal Nov. 23 that he can be flexible in curbing inflation back to the bank’s 2 percent target.
Interest Rates
Economists predicted no changes to Canadian interest rates until October 2012 at the earliest, even with inflation having exceeded 2 percent for 11 straight months. The Fed has pledged to hold rates steady until at least mid-2013, while the ECB cut borrowing costs this month.
Canadian employment unexpectedly fell for a second month in November, the first time since the 2009 recession that the economy registered back-to-back job losses.
Payrolls fell by a net 18,600 last month, following October’s 54,000 drop that was the largest since February 2009, Statistics Canada said yesterday in Ottawa. The unemployment rate also rose for a second month, to 7.4 percent from 7.3 percent. None of the 23 economists surveyed by Bloomberg predicted a job loss, and the median estimate was for the unemployment rate to be unchanged.
European Meeting
European leaders will meet in Brussels on Dec. 9 in an attempt to contain a debt crisis that drove yields on Spanish and Italian debt to euro-era records last month. A European proposal to channel central-bank loans through the IMF may deliver as much as 200 billion euros ($270 billion) to fight the debt crisis, two people familiar with the negotiations said yesterday.
“A lot has been dropped on the shoulders of EU policy makers in terms of expectations,” Stewart Hall, senior currency strategist at Royal Bank of Canada, said in a telephone interview yesterday from Toronto. “The problem is that the markets are very much focused on the quick fix when European problems don’t lend themselves to that quick fix.”
French President Nicolas Sarkozy said Nov. 30 the euro area must converge economically, and German Chancellor Angela Merkel said yesterday the bloc needs a fiscal union, boosting optimism the two are nearing an agreement.
“The market wants to see euro bonds and the European Central Bank positioning itself as the funder of last resort, and anything that doesn’t involve those two components is going to fall pretty flat in terms of market response,” Hall said. “Unfortunately, this is a multi-decade process.”
The loonie has strengthened 1.4 percent in the past month, according to Bloomberg Correlation-Weighted Currency Indexes, a gauge of 10 developed-nation currencies. The greenback and yen each has gained 2.1 percent.
To contact the reporter for this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
