Canadian Dollar Gains as Berlusconi Plan to Resign Buoys Demand for Risk

Canada’s dollar rose versus its U.S. counterpart for a second day after Italian Prime Minister Silvio Berlusconi agreed to resign once austerity measures are passed, spurring appetite for higher-yielding assets.

Canada’s currency earlier dropped as much as 0.6 percent on concern Europe’s sovereign-debt turmoil is worsening. It pared losses earlier today after a report showed Canada’s housing starts were higher in October than economists forecast.

“By having Berlusconi walk away, the market sees one of the uncertainties as being off the table,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said in a telephone interview. “Moving forward with austerity measures is likely to attract some bids into the euro. That should be beneficial to the Canadian dollar as well.”

The loonie, as the Canadian currency is also known, appreciated 0.4 percent to C$1.0088 per U.S. dollar at 5 p.m. in Toronto. One Canadian dollar buys 99.13 U.S. cents.

Canadian Finance Minister Jim Flaherty said he’ll delay plans to balance the budget by one year and implement new stimulus measures to help bolster a slowing recovery.

Flaherty, 61, released a budget update that projects a return to surplus by the fiscal plan that begins in April 2015, one year later than had been planned in his June budget. Canada will scale back planned payroll-tax increases at a cost of C$600 million ($594 million).

Employment Drop

Prime Minister Stephen Harper said last week that Europe’s debt crisis has begun to have an impact on the country’s growth outlook, citing a 54,000-job drop in employment during October.

Volatility in the Canadian dollar versus the greenback was 12.69 percent after falling on Oct. 28 to 10.92 percent, the lowest level in more than a month. The average over the past five years is 11.70 percent.

Implied volatility, which traders quote and use to set option prices, signals the expected pace of swings in the underlying currency.

“The risk environment is still perceived in the bigger picture as, at very best, nervous,” Alan Ruskin, global head of Group of 10 foreign-exchange strategy in New York at Deutsche Bank AG, said in a telephone interview. “This is not an environment in which people are going to take large positions, and certainly large, long risk positions.” A long is a bet an asset may gain in value.

Italy Austerity

The euro advanced against the dollar after Italian President Giorgio Napolitano said Berlusconi agreed to resign following parliament’s approval of the country’s austerity plans. Napolitano made his announcement in an e-mailed statement after talks with Berlusconi. The statement didn’t say when the austerity vote, tentatively scheduled for next week, would take place.

“It looks like Italy could move forward with better austerity programs, and quicker, without Berlusconi at the head of the table,” said National Bank’s Spitz. “Ultimately it’s putting a bid to the euro and, by extension, an offer to the U.S. dollar across the board.”

Government bonds fell, with 10-year bonds yields rising 2 basis points to 2.18 percent. The price of the 3.25 percent securities maturing in June 2021 decreased 20 cents to C$109.20.

Canada will sell C$3.5 billion ($3.47 billion) of 1 percent bonds due in February 2014 tomorrow, according to the Bank of Canada’s website. The previous auction of two-year bonds on Oct. 19 produced an average yield of 1.097 percent and a bid-to-cover ratio of 2.38, compared with a five-auction average of 2.47, Bank of Canada figures show.

2011 Bond Return

Government bonds have returned 7.8 percent this year in what would be the biggest annual gain since 2008, according to a Bank of America Merrill Lynch index.

The Standard & Poor’s 500 Index reversed losses, rising 1.2 percent. Futures on crude oil, the nation’s largest export, rose 1.3 percent to $96.80 a barrel in New York.

Housing starts were at a seasonally adjusted annual pace of 207,600 in October, Canada Mortgage and Housing Corp. reported. The median forecast of 19 economists in a Bloomberg News survey was for a reading of 195,000.

The loonie has dropped 4.3 percent this year in the worst performance among 10 developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The greenback is down 2.7 percent. The Norwegian krone is up 2.1 percent in the best performance.

To contact the reporter on this story: 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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