Canada’s Dollar Hits a Three-Year High on U.S. Debt-Ceiling Negotiations

Canada’s dollar appreciated to the highest level since November 2007 as the greenback declined against all of its most-traded counterparts on concern the U.S. may fail to reach agreement on raising its debt cap.

The loonie, as the currency is sometimes known, underperformed its commodity-based peers, the dollars of New Zealand and Australia, as President Barack Obama said the U.S. may experience a “deep economic crisis” if leaders fail to reach a compromise on spending cuts and the nation defaults. The U.S. is Canada’s largest trading partner.

“The Canadian dollar has a lot of momentum right now, and this is clearly linked to the impasse in the U.S. debt-ceiling talks,” said Francois Belanger, director of foreign exchange sales at Bank of Montreal’s BMO Capital Markets unit, in a telephone interview from Montreal. “The global appetite for Canadian assets in general is quite strong, and it’s become stronger since the end of June.”

The Canadian currency gained 0.3 percent to 94.43 cents per U.S. dollar at 5 p.m. in Toronto, compared with 94.72 cents yesterday. It touched 94.07 cents, the strongest level since Nov. 9, 2007. One Canadian dollar buys $1.0590.

The currency weakened 0.7 percent against the Aussie and 0.5 percent versus the kiwi.

Overseas Demand

International purchases of Canadian bonds have set records the past two years as investors favored the securities of governments with lower debt burdens. Non-resident investors purchased a net C$11.1 billion ($11.8 billion) of government bonds in May, Statistics Canada said July 18.

Yields on two-year Government of Canada bonds fell two basis points to 1.48 percent as the price of the 2 percent note due in August 2013 rose 4 cents to C$101.03. The yield on the 10-year note fell four basis points to 2.89 percent.

Obama blamed the stalemate in the U.S. on a group of Republicans in the House who are insisting on budget cuts and no tax increases. “If we stay on the current path, our growing debt could cost us jobs and do serious damage to the economy,” Obama said in a prime-time televised address yesterday from the White House.

“If they fail to come to an agreement and they fail to raise the debt ceiling, then it could be a very different picture,” said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley, by phone from London. “Then I think the risk is it does start to spill over then into having a broader negative impact on risk appetite. But we continue to believe the U.S. authorities will come to an agreement.”

Central Banking

Demand for the Canadian dollar has also been buoyed since Bank of Canada policy makers on July 19 eliminated the word “eventually” from a phrase about the timing of the next increase.

“The Bank of Canada sent the signal that they are going to raise rates in the medium term, and that has sparked additional interest in the Canadian dollar,” BMO Capital’s Belanger said. “But if there’s a deal in Washington I wouldn’t be surprised to see the loonie pull back to 96.50 or 97 in the next two weeks.”

Crude oil futures rose as much as 1.4 percent to $100.62 a barrel in New York before trading at $99.26. Crude is Canada’s largest export. Copper for three-month delivery rose $165, or 1.7 percent, to $9,820 a ton on the London Metal Exchange. Canada derives about half its export revenue from raw materials.

Canada’s dollar has weakened about 2 percent this year versus the currencies of nine other developed nations in the fourth-worst performance, according to Bloomberg Correlation- Weighted Currency Indexes. The greenback has fallen 7.9 percent, the yen is off 3.6 percent and sterling is down 2.6 percent.

To contact the reporters on this story: Frederic Tomesco in Montreal at tomesco@bloomberg.net; Chris Fournier in Halifax, Nova Scotia at cfournier3@bloomberg.net

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

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