Canadian Currency Strengthens to Three-Week High as Risk Demand Increases

Canada’s dollar strengthened to a more than three-week high versus the greenback as optimism about growth in the U.S. and China, the world’s two largest economies, fueled investor appetite for higher-yielding assets.

The currency, nicknamed the loonie, capped its second weekly gain on Sept. 10, the day Statistics Canada reported employers added more jobs in August than economists expected, and two days after the Bank of Canada raised interest rates for the third time since May.

“The Bank of Canada rate hike and ensuing employment report has lent a nice push” to the Canadian dollar, Michael Leavitt, a Montreal-based institutional-derivatives broker at MF Global Canada Co., said via e-mail. He predicts the currency may head towards C$1.0500 to C$1.0100 versus the greenback.

The Canadian currency rose 0.9 percent to C$1.0284 at 4:19 a.m. in Toronto from C$1.0370 on Sept. 10. The dollar, known as the loonie for the waterfowl on the C$1 coin, climbed as much as 1 percent to C$1.0266, the strongest level since Aug. 19. One Canadian dollar purchases 97.24 U.S. cents.

The loonie advanced before reports this week forecast by Bloomberg surveys to show retail sales in the U.S., Canada’s biggest trading partner, rose in August for a second month and consumer prices increased.

The Basel Committee on Banking Supervision yesterday gave lenders up to eight years to comply with higher capital requirements intended to prevent future crises, easing concern added regulations would crimp banks’ ability to generate profit. China’s industrial production and retail sales rose last month more than forecast, data showed.

‘Optimistic Mood’

“Markets are in an optimistic mood following China’s data over the weekend and the Basel results,” Sacha Tihanyi, a currency strategist in Toronto at Bank of Nova Scotia’s Scotia Capital unit, said via instant message. “There is optimism heading into a very busy U.S. data week. This lighter mood in the U.S. certainly helps the Canadian dollar.”

Employers expanded payrolls last month by a net 35,800 jobs, the statistics agency said Sept. 10. A Bloomberg News survey forecast a gain of 30,000 jobs in August. The Bank of Canada raised its benchmark overnight rate by 25 basis points to 1 percent, matching similar moves in June and July.

Europe’s economy may grow 1.7 percent this year, almost twice as fast as previously forecast, the European Commission said in a report published today.

Stocks climbed, with the Standard & Poor’s 500 Index gaining 1.1 percent. Crude oil for October delivery touched $78.04 a barrel in New York, the highest level in a month. Crude is Canada’s biggest export.

Sales

China’s industrial output rose 13.9 percent in August from a year earlier, data released Sept. 11 by the National Bureau of Statistics showed, compared with a 13 percent expansion forecast in a Bloomberg survey. Retail sales were up 18.4 percent in August from a year earlier, versus an 18 percent increase forecast in a separate survey.

The euro gained against 10 of its 16 major counterparts on speculation the regulations from the Basel Committee, which reached a compromise as it seeks to rein in the risk-taking that caused the financial crisis, will give European banks time to raise additional funds. The greenback was the worst performer.

The loonie fell 0.6 percent to C$1.3235 per euro, while gaining 0.3 percent to 81.36 yen. It gained for the fourth straight day versus the pound, advancing 0.4 percent to C$1.5863. It will weaken by year-end to C$1.05 per U.S. dollar, says the median of 33 estimates in a Bloomberg News survey of economists.

‘Bearish Sentiment’

“Bearish sentiment” has increased for the U.S. dollar versus the loonie, George Davis, chief technical analyst at Royal Bank of Canada’s RBC Capital Markets unit, wrote in a note to clients. Resistance levels at C$1.0364 and C$1.0390 are expected to “cap the topside” for the U.S. currency, while a sustained break below C$1.0287 would “expose congestive support” for the greenback at C$1.0249, he wrote.

Support and resistance refer to the lower and upper boundaries, respectively, of a trading range, where buy and sell orders may be clustered.

Canada’s currency depreciated to C$1.0853 on May 25, the weakest level since November, after reaching parity with the greenback on April 6 for the first time in almost two years.

The loonie traded on a one-for-one basis with the U.S. currency in September 2007 for the first time in three decades, capping a five-year run on the back of booming demand for the nation’s commodities, from which it derives about half its export revenue.

Bonds Erase Losses

Government debt rose today, reversing losses. The 10-year benchmark bond yielded 2.95 percent after earlier rising above 3 percent for the first time in a month. The price of the 3.5 percent security due in June 2020 rose 18 cents to C$104.58.

The 10-year yield will rise to 3.27 percent by the end of this year, according to the median of 8 economists’ forecasts in a Bloomberg News survey.

Bank of Canada Governor Mark Carney is scheduled to speak tomorrow in Berlin about financial reform. His remarks will be published on the bank’s website at 10:45 a.m. New York time.

Timothy Lane, the central bank’s deputy governor, speaks the following day in St. John’s, Newfoundland. His remarks will be published on the website at 11:45 a.m. New York time.

BNP Paribas SA said investors should sell the pound and the U.S. dollar against the Canadian dollar as the Bank of Canada raises interest rates and the nation benefits from potentially stronger commodities demand. Canada in June became the first Group of Seven country to increase borrowing costs after last year’s global recession. The central bank has lifted the benchmark rate twice since then, bringing it to 1 percent from a record low 0.25 percent.

“If the global economy recovers, the subsequent positive terms-of-trade shock will heavily favor Canada relative to the U.K.,” a team of analysts in London led by Hans-Guenter Redeker said today in an investor report. “Even in the case where the global economy would go for a double-dip, clean balance sheets will favor the Canadian dollar.”

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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