Canadian Dollar Gains to Strongest Level Since 2008 as Commodities Advance

Canada’s dollar reached its strongest level in 2 1/2 years versus the greenback, capping a second straight annual advance, as oil at a 26-month high burnished the allure of currencies tied to global growth.

The Canadian currency gained for a second week and for the month. It rose 5.5 percent versus its U.S. counterpart in 2010, after a 16 percent gain in 2009. The greenback fell against most major counterparts for the year and month as investors sought higher-yielding assets. Canada’s employers added jobs in December for a third month, a report next week may show.

“The Canadian dollar was caught up in broad U.S. dollar selling,” Sacha Tihanyi, a currency strategist at Bank of Nova Scotia’s Scotia Capital unit, said by phone from Toronto. Crude near $92 a barrel and copper at a record are “very supportive and have underpinned” the Canadian dollar, he said.

The currency touched 99.26 Canadian cents per U.S. dollar yesterday in Toronto, the strongest since May 30, 2008. It ended the year at 99.80 cents, the first annual close above parity since 2007, from C$1.0532 on Dec. 31, 2009. One Canadian dollar buys $1.0020.

Canadian government bonds advanced for 2010, and Pacific Investment Management Co.’s Bill Gross said investors should buy them instead of U.S. dollar-denominated government debt weighed down by budget deficits.

The loonie, as Canada’s dollar is known for the image of the aquatic bird on the $C1 coin, will trade between parity with its U.S. counterpart and C$1.01 through 2011, according to the median forecast in a Bloomberg survey of 29 economists.

Largest Supplier

Crude oil for February delivery ended the year at $91.38 a barrel in New York, the highest annual close since 2007. It rose to $92.06 yesterday, the most expensive since Oct. 7, 2008, more than doubling in two years. Canada is the largest supplier of crude to the U.S.

Copper and tin climbed to all-time highs in 2010 as the global economy recovered from its worst recession since World War II. Raw materials including copper, tin and crude account for about half of Canada’s export revenue.

“Base metals certainly played a role” in Canadian-dollar strength in 2010, while “oil prices have only provided recent support,” David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital Markets unit, wrote in an e-mail. “Risk-on and the equity rally also played a role, as did reserve diversification.”

The Standard & Poor’s 500 Index climbed 13 percent in 2010. Russia announced Nov. 24 it had begun diversifying its foreign- exchange reserves by purchasing Canadian dollars.

Canadian Jobs

Employers in Canada added 20,000 jobs in December, after creating 15,200 positions in November and 3,000 in October, according to the median forecast of 20 economists in a Bloomberg News survey. Statistics Canada reports the data on Jan. 7 in Ottawa. Reports due in Washington the same day are forecast to show U.S. employers added 140,000 jobs in December and the jobless rate fell to 9.7 percent.

“Next week is holding a lot of risk” for the Canadian dollar, Scotia Capital’s Tihanyi said, citing reports in Canada and the U.S. “The risk is that unless we get some really solid fundamental data, then we’ll stay in this developed range. It’s going to take something pretty significant on the fundamental front to help us get past the C$0.9900 level.”

The Canadian currency traded on a one-for-one basis with its U.S. counterpart on Dec. 31 for a fourth straight day. It reached parity with the dollar in September 2007 for the first time in three decades, capping a five-year run on the back of booming demand for commodities.

Fell Versus Franc

The loonie rose 2.9 percent in December versus the greenback, ranking 14th among the U.S. currency’s 16 most-traded counterparts. It gained the most versus the dollar and fell the most against the Swiss franc, 4.1 percent.

For the year, the Canadian dollar advanced against seven of its major peers. It rose the most against the Danish krone, 13 percent, and fell the most versus the yen, 8 percent.

The Bank of Canada was the first among Group of Seven central banks to raise interest rates since July 2008, lifting its target overnight rate to 1 percent from 0.25 percent in three successive moves starting June 1. It held rates steady at its last two meetings. The next is scheduled for Jan. 18.

Canadian government bonds returned 6.2 percent in 2010 after losing 1.5 percent in 2009, according to a Bank of America Merrill Lynch index. That compared with a 5.9 percent gain by Treasuries in 2010, and a return by global sovereign bonds of 3.6 percent.

10-Year Yield

Canada’s benchmark 10-year yield ended the year at 3.12 percent, down 49 basis points from where it ended 2009, 3.61 percent. It rose to as high as 3.75 percent in April and dipped to 2.68 percent in October. A basis point is 0.01 percentage point. The price of the 3.5 percent bond due in June 2020 rose C$5.36 in the year to C$103.07.

“It’s a critical strategy going forward to get out of the dollar and into some currency that holds its value,” Gross, manager of the world’s biggest bond fund at Newport Beach, California-based Pimco, said in an interview on a Bloomberg Television “Surveillance Midday” program with Tom Keene taped on Dec. 22 and broadcast yesterday for the first time. “I’d suggest Mexico, Brazil or Canada as three examples of countries with good fiscal balance sheets.”

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

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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