Canada's Dollar Gains for Second Straight Month on Global Growth Optimism

Canada’s dollar gained for a second consecutive month, reaching parity with its U.S. counterpart for the first time since April, on speculation an easing of monetary policy by the Federal Reserve will spur global growth.

The loonie, as the currency is sometimes known because of the waterfowl on the one-dollar coin, strengthened 1 percent, after a 3.5 percent rally in September. Canada’s gross domestic product increased 0.3 percent in August after shrinking the month before, Statistics Canada said yesterday. A report on Nov. 5 will show employers added 15,000 jobs to payrolls in October, economists predict.

“Appetite for risk” drove the currency higher, said Carlos Leitao, chief economist at Laurentian Bank Securities in Montreal, said in a telephone interview. He predicted the loonie will trade at 98.5 U.S. cents at year-end. “The biggest impact is risk on, risk off. Right now we’re a little bit risk on.”

The Canadian dollar rose to C$1.0194 per U.S. dollar yesterday in Toronto, from C$1.0292 on Sept. 30. One Canadian dollar buys 98.10 U.S. cents. The loonie was worth more than its U.S. counterpart on Oct. 14. for the first time since April 26.

The MSCI World Index of stocks in 24 developed economies hit the highest since April this week, and the Standard & Poor’s 500 Index touched the strongest level since May before ending the week little changed. Canada’s primary equity gauge, the Standard & Poor’s/TSX Composite Index, rose 0.6 percent.

‘Sell North America’

Fed policy makers meet Nov. 2-3 to consider more purchases of Treasuries to flood markets with cheap money in a strategy called quantitative easing aimed at preventing stagnating prices from undermining the U.S. recovery. They deployed $1.7 trillion to pull the U.S. economy out of the financial crisis in a program that ended in March.

“If we look at the last three months, essentially when QE2 expectations started picking up and U.S. yields declined, the Canadian dollar is the worst performer in the G-10 after the U.S. dollar,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank in Toronto, wrote in an e-mail. “That suggests to a degree, the Canadian dollar is getting dragged down with the U.S. dollar in a sell-North America trade.”

The loonie extended gains yesterday after government reports showed the U.S. and Canadian economies are expanding. Canada’s grew 0.3 percent in August after shrinking 0.1 percent in July. The U.S. economy grew at a 2 percent annual rate in the third quarter, Commerce Department figures showed. Both reports matched median forecasts in separate Bloomberg surveys.

Bank of Canada

Canada’s dollar has weakened 1.5 percent since then as the Bank of Canada halted interest-rate increases on Oct. 19, after three successive increases, citing a “weaker U.S. outlook.” Canada ships about two thirds of its exports to the U.S.

“The Canadian economy continues to be shackled to its largest trading partner, the U.S., and the very reason why the Bank of Canada have prudently stepped to the sidelines,” Dean Popplewell, an analyst in Toronto at the online currency-trading firm Oanda Corp., wrote via e-mail. “The Canadian dollar has been caught in a dollar debasing jet-stream.”

Canada’s benchmark 10-year note’s yield climbed 6 basis points, or 0.06 percentage point, to 2.80 percent this month. The price of the 3.5 percent security maturing in Jun 2020 fell 52 cents to C$105.84. Canada’s government bonds have lost investors 0.1 percent this month, according to a Merrill Lynch & Co. index.

Government Debt

Canadian 10-year bonds yielded 21 basis points more than their U.S. counterparts yesterday, near the narrowest gap in almost three months and down from as much as 37 basis points on Oct. 7. Longer-term bond prices are falling faster in the U.S. than in Canada, pushing yields up more quickly.

Canada’s dollar will climb to C$1.01 versus the greenback by the end of the year and will trade at parity by the middle of 2011, according to the median of 35 economists’ estimates compiled by Bloomberg.

Canada’s unemployment rate held steady at 8 percent and the nation’s employers added 15,000 positions to payrolls, the median forecasts of 16 economists in Bloomberg surveys. Statistics Canada releases the data on Nov. 5 at 7 a.m. in Ottawa, the nation’s capital.

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

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

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