BLBG: Canadian Dollar Gains for Third Day on Outlook for Higher Rates
By Chris Fournier
Dec. 22 (Bloomberg) -- Canada’s dollar strengthened against its U.S. counterpart for a third day on speculation an accelerating economic recovery will prompt the central bank to raise interest rates sooner than it expected.
The Canadian dollar, up 15 percent this year, outperformed all 16 of its major counterparts tracked by Bloomberg for a second consecutive day. Government bonds tumbled as global stocks rose, pushing the yield on Canada’s benchmark 10-year note to a four-month high.
“The market is slowly starting to price in higher rates in Canada,” said Jonathan Gencher, Toronto-based director of foreign-exchange sales at Bank of Montreal, the nation’s fourth- largest bank. “The market has come back to thinking Canada is going to head back toward parity” with the U.S. dollar.
The Canadian currency, nicknamed the loonie for the image of the waterfowl on the C$1 coin, appreciated 0.4 percent to C$1.0577 per U.S. dollar at 4:39 p.m. in Toronto, from C$1.0622 yesterday. The currency last traded on a one-for-one basis to the greenback in July 2008. One Canadian dollar purchases 94.55 U.S. cents.
The loonie trimmed gains as crude oil, Canada’s biggest export, slowed an advance.
The paring by the currency “seems to have corresponded quite well to a drop in oil prices from their intraday highs and some additional U.S. dollar strength,” said Sacha Tihanyi, a currency strategist in Toronto at Bank of Nova Scotia, Canada’s third-largest lender. “It’s probably being exacerbated by illiquidity.”
Crude for February delivery traded at $74.10 a barrel on the New York Mercantile Exchange, up 0.5 percent, after earlier climbing 1.6 percent.
Bond Yields Climb
The 10-year Canadian note’s yield rose as much as 12 basis points, or 0.12 percentage point, to touch 3.62 percent, the highest level since Aug. 7, before trading at 3.59 percent. The price of the 3.75 percent security due in June 2019 dropped 71 cents to C$101.25. The two-year yield increased four basis points to 1.39 percent.
“Most of the move is driven by pressure in the U.S.,” said Mark Chandler, a fixed-income strategist in Toronto at Royal Bank of Canada, the nation’s largest lender, referring to a surge by U.S. Treasury yields over the past three days. “We’ve been dragged higher with the move in Treasuries.”
A report today by the National Association of Realtors showed purchases of existing homes in the U.S. increased 7.4 percent in November to a 6.54 million annual rate, the highest level since February 2007, helping spur gains by the U.S. dollar. The greenback rose to a three-month high against the currencies of major U.S. trading partners tracked by the IntercontinentalExchange Inc.’s Dollar Index.
‘More Positive’
The currency market “is starting to get more positive on North American growth prospects overall,” said Steve Butler, director of foreign-exchange trading in Toronto at Bank of Nova Scotia, Canada’s third-largest lender. “What’s good for the U.S. is very good for Canadian growth.”
Canadian gross domestic product rose 0.3 percent in October, after climbing 0.4 percent in September, Statistics Canada is likely to say tomorrow, according to the median estimate of 20 economists in a Bloomberg survey.
Traders stepped up bets on rate increases. The yield on the overnight index swap due in nine months, based on predictions for the Bank of Canada’s rate at that time, increased to 0.41 percent, the highest in two months, from 0.38 percent on Dec. 18 and 0.32 percent at the end of November.
Rate Decision
Central-bank policy makers next meet on Jan. 19 to determine interest rates. They held the benchmark rate steady at a record low 0.25 percent at their last meeting on Dec. 8 and reiterated a pledge to leave it there though June 2010, barring a change in the inflation outlook.
The MSCI World, a benchmark index for 23 developed markets, rose 0.3 percent, on course for a 26 percent gain this year. The Standard & Poor’s 500 Index advanced 0.4 percent.
Canada’s dollar is the only one of the 16 most-traded currencies to outperform the greenback for the past five days.
“The Canadian dollar is out of whack with what’s going on,” said John Curran, a Toronto-based senior vice president at CanadianForex Ltd., an online foreign-exchange dealer. “Although we’ve had decent performance, the overall theme is to be buying U.S. dollars slowly but surely.”
Curran said the C$4.1 billion ($3.9 billion) purchase by Korea National Oil Corp. of Harvest Energy Trust, a Canadian oil producer and refiner, may be behind the recent strength in the loonie. The deal was scheduled to close today, according to a statement yesterday from Harvest Energy.
To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
