Canada Dollar Strengthens for Fourth Straight Week on Fed Easing Prospects

The Canadian dollar rose for a fourth week, the currency’s longest winning streak since May 2009, as the Federal Reserve said it’s willing to ease monetary policy further to boost the U.S. economy, spurring demand for assets that benefit from global growth.

The currency, known as the loonie for the waterfowl’s image on the dollar coin, gained even as reports showed inflation and retail sales unexpectedly fell. The Fed said Sept. 21 it’s “prepared to provide additional accommodation” to boost the economy of Canada’s biggest trading partner. Canadian gross domestic product fell 0.1 percent in July, according to a Bloomberg survey before the report next week.

“This week saw Canadian dollar strength and that’s been on the back of high-level market confidence,” said Darren Richardson, senior corporate dealer in Toronto at CanadianForex Ltd., an online foreign-exchange dealer. “When the Fed announced their possible plans to increase stimulus, it boosted confidence in economic output and that’s a positive for Canadian dollar strength.”

The loonie added 0.9 percent to C$1.0241 per U.S. dollar in the five-day period ended yesterday. It was the currency’s longest winning streak against the greenback since the six-week period ended May 8, 2009.

The S&P/TSX Composite Index added 0.3 percent this week and the MSCI World Index of equities rallied 2.3 percent, rising for a fourth straight week. Crude oil, Canada’s biggest export, advanced 3.9 percent and gold reached a record high of $1,301.60.

Foreign Purchases

“There seems to be a picture of relative tranquility for the Canadian dollar as the mayhem continues all around us,” said Shaun Osborne, chief currency strategist at Toronto- Dominion Bank’s TD Securities unit in Toronto.

Net buying by foreign investors of Canadian bonds, equities and money market securities rose in July, with purchases totaling C$5.48 billion ($5.32 billion) in the month, compared with C$5.39 billion in June, Ottawa-based Statistics Canada said Sept. 20. Non-residents bought C$5.17 billion of bonds, the 19th consecutive monthly net purchase for such securities.

Canada’s budget deficit narrowed in July because of higher tax revenue and a drop in spending that reflected fewer jobless- benefit payouts and last year’s support of the automobile industry.

Canada recorded a deficit of C$473 million in July, down from C$5.82 billion during the same month last year, according to a statement released yesterday by the finance department. For the April-July period, the cumulative deficit narrowed to C$7.7 billion from C$18.3 billion a year ago.

Commodity Currencies

The loonie was the fourth worst performer against the greenback this week among the 16 most-traded currencies, strengthening more than just the Brazilian real, South Korean won and the Taiwanese dollar.

“We’re tied to the U.S. economy more so than some of these other commodity currencies,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal. “There are a lot of concerns about the U.S. economy and potential quantitative easing. There are concerns that our economy will slow as the U.S. economy does.”

Statistics Canada reported Sept. 21 the consumer price index fell 0.1 percent in August, and rose 1.7 percent from a year ago following July’s 1.8 percent gain. Economists surveyed by Bloomberg forecast the price index would be unchanged during August and the annual rate would accelerate to 1.9 percent, the median of 16 estimates.

‘Debt Overhang’

Retail sales unexpectedly decreased 0.1 percent to C$35.9 billion in July as consumers cut purchases of furniture, appliances and electronics, Statistics Canada reported. The median forecast of 15 economists in a Bloomberg News survey was for a 0.6 percent gain.

Bank of Canada Governor Mark Carney said that low U.S. inflation may necessitate a response from the Fed and that he is concerned about the level of consumer borrowing in his country.

Speaking in a CNBC Television interview yesterday, Carney said the “debt overhang” in the U.S. is “pushing inflation to very low levels, and it may necessitate a Fed response. They’ll take that decision and we’ll deal with the consequences.”

Canada’s financial system is “firing on all cylinders” while low interest rates have encouraged borrowing, Carney said.

Bank of Canada has increased interest rates three times since June to 1 percent from 0.25 percent, and said Sept. 14 the country’s recovery will be “slightly more gradual” than expected earlier this year. Policy makers next meet on Oct. 19.

Government Debt

Economists in a Bloomberg survey predict the central bank’s key overnight rate will rise to 1.5 percent by mid-2011, according to the weighted average. The Fed will keep its interest rate at a target range of zero to 0.25 percent until the third quarter next year, a separate survey showed.

Government bonds rose for a second week. The 10-year bond yield dropped 5 basis points, or 0.05 percentage point, to 2.87 percent. The price of the 3.5 percent security maturing in June 2020 rose 56 cents to C$105.33.

The yield advantage of Canada’s 10-year bonds over equivalent-maturity U.S. Treasuries narrowed to 6 basis points this week to 26 basis points.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net.

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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