Canadian Currency Strengthens Amid Advances by Crude Oil, Global Equities

Canada’s currency rose the most in two weeks against its U.S. counterpart as gains in stocks and crude oil eased concern that global growth is slowing.

The Canadian dollar, nicknamed the loonie, was poised for a 1.9 percent advance this week. The Bank of Canada in a monetary policy report today said its economic forecast includes “gradual” interest-rate increases to control inflation in an economic recovery hampered by slower foreign demand.

“You don’t have to look further than equities” to explain today’s gains in the Canadian dollar, Matthew Strauss, a senior currency strategist at Royal Bank of Canada, said by phone from Toronto. “Sentiment has turned into a really strong bullish risk-rally.”

The Canadian dollar gained as much as 1.3 percent, the biggest intraday gain since July 6, to C$1.0356 per U.S. dollar before trading at C$1.0383 at 4:44 p.m. in Toronto, from C$1.0491 yesterday, when it reached C$1.0351, the strongest level since July 15. One Canadian dollar buys 96.31 U.S. cents.

The loonie will strengthen to C$1.02 against the U.S. dollar by the middle of next year, according to the median forecast in a Bloomberg News survey of 35 economists.

Canada’s currency briefly pared gains after a government report showed retail sales unexpectedly fell 0.2 percent to C$36 billion ($34.6 billion) in May on lower receipts at building material stores and gasoline stations. Economists surveyed by Bloomberg News anticipated a 0.4 percent rise, according to the median of 19 estimates. The drop reflected falling prices, as sales in volume terms rose 0.4 percent.

‘On the Precipice’

The MSCI World Index advanced 2 percent. Futures on crude oil, Canada’s largest export, climbed 3.3 percent. Canada’s dollar tends to track movements in stocks and commodity prices.

“We’re on the precipice of a bigger move within a couple of days at most after narrowing the recent trading range,” Michael Leavitt, a Montreal-based institutional-derivatives broker at MF Global Holdings Ltd., said by e-mail, citing stronger equities and commodity prices. He foresees the Canadian currency at C$1.080 or parity in 3 weeks or less.

Canada’s government bonds fell, with the yield on the 10- year benchmark climbing 5 basis points, or 0.05 percentage point, to 3.21 percent. The 3.5 percent security due in June 2020 dropped 44 cents to C$102.43.

The nation’s government bonds have lost investors 0.48 percent this month, headed for the worst performance since March, when the debt lost 0.83 percent, according to a Bank of America Merrill Lynch index.

‘Weighed Carefully’

Bank of Canada Governor Mark Carney raised the benchmark interest rate July 20 by a quarter-percentage point for a second month, to 0.75 percent, and said further action will be “weighed carefully against domestic and global economic developments.”

Carney also cut the nation’s growth forecast by 0.2 percentage point this year and next, to 3.5 percent and 2.9 percent, respectively, and said inflation will stay close to his 2 percent target through 2012. Today’s Bank of Canada report contained “no real surprises,” RBC’s Strauss said.

The loonie, which traded on a one-for-one basis with the greenback on April 6 for the first time in almost two years, has gained 4.9 percent this year, according to Bloomberg Correlation-Weighted Currency Indices, the second-best performance among its 10 developed world counterparts behind the yen’s 11 percent increase.

To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net; Alex Kowalski in New York at akowalski13@bloomberg.net

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