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Loonie Climbs for Second Day as Bank of Canada Raises Rates, Stocks Gain
Canada’s dollar strengthened for a second day, reversing an earlier decline, after the Bank of Canada raised interest rates for the second time in less than two months and stocks advanced.
Governor Mark Carney lifted the target rate for overnight loans between commercial banks by a quarter percentage point to 0.75 percent, a decision predicted by all 20 economists surveyed by Bloomberg News. Traders bought the loonie, as Canada’s currency is known, to cover bets that it would fall past C$1.06 against the greenback after the rate decision.
“Failure to get over that trend line just over C$1.06 along with a nice recovery in stocks, oil and gold” means the Canadian dollar is moving higher, Steve Butler, director of foreign-exchange trading in Toronto at Scotia Capital Inc., a unit of Canada’s third-largest bank, said in an e-mail. “Looks like day traders got caught long and wrong.”
The Canadian currency climbed 1.1 percent, the most since July 9, to C$1.0438 per U.S. dollar at 4:02 p.m. in Toronto, from C$1.0549 yesterday. One Canadian dollar buys 95.80 U.S. cents.
The loonie, as the currency is known for the aquatic bird on the one-dollar coin, earlier weakened as much as 0.4 percent. The central bank cut the nation’s growth forecast to 3.5 percent from 3.7 percent for this year and to 2.9 percent from 3.1 percent for 2011 and suggested the pace of interest-rate increases may slow, according to a statement today from the Ottawa-based bank.
‘Directional Clues’
“It basically reaffirms the view that rates are going to move up but they aren’t going to move up too quickly,” Shaun Osborne, chief currency strategist in Toronto at TD Securities Inc. and the most accurate foreign-exchange forecaster in a Bloomberg survey, said by phone from Toronto, referring to the statement. “My guess is we’ll sit in a bit of a range from here and await more directional clues.”
Longer-maturity government bonds fell. The yield on the benchmark 30-year climbed 4 basis points to 3.78 percent. The 5 percent security maturing in June 2037 fell 73 cents to C$120.60 per $1,000 face value.
The spread between the 30-year benchmark and its U.S. counterpart narrowed to 20 basis points, the least since October 2009.
“The bank said pretty much what the market was expecting: here’s your rate hike and here’s more dovish news,” Jonathan Gencher, Toronto-based director of foreign-exchange sales at BMO Capital, a unit of Canada’s fourth-largest bank, said by phone from Toronto. “They’re still on track to hike in September; Canadian data warrants it. They’re certainly going to depend on data going forward.”
Employment Growth
Carney has led his colleagues in the Group of Seven with rate increases as Canada’s economic growth and job creation rebound faster from last year’s global recession. Since recording a 6.1 percent annualized growth rate for the first quarter, reports have shown economic growth stalled in April while the bank said June 21 that global financial strains have increased since the end of last year.
Employment rose by 93,200 jobs in June, Statistics Canada said July 9 in Ottawa, almost five times the median forecast for 20,000 new jobs in a Bloomberg survey of 23 economists.
“Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments,” the central bank’s statement said, repeating a phrase used in the June 1 rate increase.
‘Very Cautious’
Policy makers also said the economy won’t be operating at its full capacity until the end of next year, six months later than predicted in April. The growth forecast was increased for 2012, to a 2.2 percent expansion from 1.9 percent.
“The Bank of Canada was very cautious and very non- commital,” Butler said, “even more dovish than the market had expected.”
The loonie will strengthen to C$1.02 by the middle of next year, the median forecast of 31 economists and analysts surveyed by Bloomberg. Canada, which generates about half its export revenue from commodities, is the largest supplier of energy products to the U.S.
The Canadian currency, nicknamed the loonie, was the worst- performing major currency last week as investors questioned the durability of the economic recovery in the U.S., Canada’s largest trading partner. This week it’s the third best performer, behind the Australian dollar and Mexican peso, among its 16 most-traded counterparts.
The Standard & Poor’s 500 Index rose 1.1 percent after earlier dropping 1.3 percent.
To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
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