BLBG: Canadian Dollar Gains to 7-Week High as Bank Says Slump Ending
By Chris Fournier
July 23 (Bloomberg) -- Canada’s dollar rose, touching the highest level against its U.S. counterpart in more than seven weeks, as the central bank said the country’s recession is ending amid rising commodity prices and consumer confidence.
The currency gained the most in more than a week as stocks and crude oil, the nation’s biggest export, climbed. The Bank of Canada raised its output estimate and said the pace of the recovery will be muted by a strong currency.
“There was little to stem a Canadian dollar rally,” said David Watt, senior foreign-exchange strategist in Toronto at RBC Capital, a unit of the nation’s biggest bank. “Overall, I don’t see much to stop the Canadian dollar from its current direction.”
The currency, known as the loonie, appreciated 0.9 percent to C$1.0895 per U.S. dollar at 4:56 p.m. in Toronto, compared with C$1.0997 yesterday. It rose as much as 1.4 percent, the most on an intraday basis since July 15, and touched C$1.0841, the strongest level since June 3. One Canadian dollar buys 91.79 U.S. cents.
Global recovery is “nascent” and the slump seems to be bottoming, Bank of Canada Governor Mark Carney said at a press conference. A stronger currency against the greenback is “an important brake” on growth, he said. The bank’s forecast assumes the loonie will average 87 U.S. cents through 2011, and it said recent strength reflects higher commodity prices and “generalized weakening of the U.S. dollar.”
‘Source of Concern’
“He’s saying that sure, the rising currency is a source of concern to the bank; he’s not saying that they’ll do anything right away,” said Carlos Leitao, chief economist at Laurentian Bank Securities Inc. in Montreal. “But at the same time, if they were going to do something, they would just do it without announcing it.”
The bank’s figure of 87 U.S. cents, or about C$1.15 per U.S. dollar, “works” as an assumption, given the “currency markets move a lot,” Leitao said. He added that the loonie could be well below that level in two months time.
Output will expand at a 1.3 percent annualized pace in the July-September period, the central bank said. That replaced the prior estimate of a 1 percent contraction, marking the end of a recession that started in the fourth quarter of last year.
The Standard & Poor’s 500 Index climbed 2.3 percent. Crude oil for September increased 2 percent to $66.73 a barrel in New York, after falling earlier as much as 1.5 percent. Raw materials account for more than half of Canada’s export revenue, and crude is its biggest export.
“Equities and commodities are moving in tandem, which means more appetite for risk and the Canadian dollar benefits from that,” said Francis Campeau, a derivatives broker at MF Global Canada Ltd. in Montreal.
Rate Bets
Canada’s dollar is the best performer this month against the greenback among the 16 most-active currencies tracked by Bloomberg, gaining 6.7 percent. The dollars of New Zealand and Australia, which like Canada’s tend to rise and fall with equities and commodities, rose 1.2 percent and 0.8 percent, respectively, this month.
“Carney gave little hint of discomfort with the Canadian dollar at current levels closer to C$1.10 and now far through it,” said RBC’s Watt, who predicts the loonie will weaken to C$1.16 by the end of this quarter.
The yield on March 2010 Bankers’ Acceptances futures, a barometer of short-term interest rates, fell by as much as 11 basis points, the most since June 11, as traders raised bets the central bank will increase borrowing costs sooner. One basis point equals 0.01 percentage point.
‘Decent Selling’
“We’ve seen decent selling in the March 2010 and further- dated BAX contracts after the Bank of Canada said the recession will end this quarter,” said David Love, a trader of interest- rate derivatives at Le Group Jitney Inc. in Montreal.
The central bank kept its key interest rate at a record low 0.25 percent two days ago and reiterated plans to leave it there through June 2010 unless the inflation outlook shifts.
“If the bullishness on the Canadian dollar is based on the view that the Bank of Canada will in the near-term start tightening, then that view is wrong and the Canadian dollar will start to pull back quite sharply,” Laurentian’s Leitao said.
Canadian government bonds fell, pushing the yield on the two-year note up 11 basis points to 1.31 percent. The price on the 1.25 percent security maturing in June 2011 dropped 19 cents to C$99.90. Government bonds have lost investors 2.7 percent this year, according to a Merrill Lynch & Co. index.
The loonie will weaken to C$1.15 by the end of this quarter, according to the median forecast of 34 economists and analysts surveyed by Bloomberg News.
To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
